BJs RESTAURANTS INC Q4 FY2023 Earnings Call

Good afternoon and welcome to the BJ's Restaurants fourth-quarter 2023 earnings release conference call. 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 fourth-quarter investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2023 fourth 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's delivered another quarter of positive comparable restaurant sales and year-over-year margin expansion, as we continue to benefit from the strategies we shared at our Investor Day in November. These strategies are focused on driving sales through our familiar-made brewhouse fabulous culinary initiative, our people initiative around hospitality and gold standard level of operational excellence, and a welcoming contemporary ambiance to our remodel initiative. Our overall strategy also encompasses margin expansion through productivity and cost savings initiatives. Taken together, and with successes already evident on many of these fronts, we have established a solid foundation for future restaurant growth and enhancements of shareholder value. From a fourth-quarter sales perspective, comparable restaurant sales were positive 0.6%, which was our 11th consecutive quarter of beating the industry as measured by Black Box. We expanded our restaurant margins to 14.4%, representing an increase of 150 basis points from the prior year, and generated adjusted EBITDA of more than $27 million in the quarter. Our margin improvement results compared to last year are even more impressive, in that fiscal 2022 was a 53-week year and included $3.2 million related to a one-time gain in gift card breakage in the fourth quarter. Therefore, excluding these benefits from last year, our restaurant level margins improved by 270 basis points and adjusted EBITDA increased by approximately 40% year over year in the fourth quarter. For the fiscal 2023 full year, adjusted EBITDA increased to approximately $104 million, an increase of more than 30% on a reported basis, and more than 40% from last year when adjusting for gift card breakage and the 53rd week that benefited fiscal 2022. While Tom will discuss this in more detail, the margin improvement initiatives that generated strong results in 2023 will continue to yield further benefits in 2024. We expect restaurant level margins to expand again this year, and increase from our fourth-quarter exit rate in the mid-14 percentage points, and further close the gap to pre-pandemic levels consistent with what we outlined in our Investor Day presentation in November. Our familiar-made brewhouse fabulous culinary strategy began this past July, as we rolled out our smaller menu removing some of the non-core menu items that added complexity. While it can be difficult to grow comp sales with fewer menu items in the short term, this is the right approach to move BJ's forward and allow for new menu innovation while improving execution and team member satisfaction. In this regard, our new familiar-made brewhouse diverse items are moving the business forward. Our October Spooky Pizookie dessert had the highest incident rate of any seasonal Pizookie, and our surf and turf combo increased our overall entrée incidents and added approximately $300 to our weekly sales average during the promotion period. We shared with the investment community in November our three-year culinary strategy, which includes upgrading 50% of our menu to have a more visual wow for our guests, ongoing investment in our core items, and further innovation around 20% of our menu focused on value and price point. The changes we made to the menu are resonating with our team and workflow, allowing us to improve overall execution. In Q4, our team member retention improved for both hourly team members and managers compared to the prior year and are now better than pre-COVID levels, bringing added stability and less training time and cost to our business. In fact, our retention was better than our casual dining peers, which has created tremendous synergy in our restaurants, bench strength, and career advancement opportunities. This synergy has led to improved net promoter scores, and again, reduced training and overtime costs, helping to move our restaurant margins in the right direction. Through our research, we know that a key differentiator in full-service restaurants is ambiance. Guests want a contemporary, relevant atmosphere that complements our team members' gracious hospitality and BJ's delicious food. In fiscal 2023, we completed 36 remodels and expect to do at least 20 remodels this year. We believe we have about 130 more restaurants that can use one aspect of our remodel program. And with several quarters of data in hand following other remodels, we know this approach helps drive sales and traffic. By the end of 2024, we expect half of our restaurants will either be remodeled or be our newer, lighter, prototype. While the best way for us to continue our margin growth is by driving top-line sales, since every additional sales dollar 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 quality standards. We have now unlocked over $35 million of cost savings on an annualized basis as we reduced food, labor, and operating and occupancy costs. Going into fiscal '24, and we expect to find additional savings that will further contribute to our initiatives to move restaurant-level margins higher. We also continue to open new restaurants in a balanced manner and make sure our portfolio is optimized to continue driving the best return for our shareholders. In 2023, we opened five new restaurants, including the relocation of our Chandler, Arizona restaurant. Our restaurants opened since 2021 are doing exceptionally well with a weekly sales average of more than $130,000 or approximately 10% higher than our system average, with restaurant level margins in the mid- to upper-teens on an annual run rate average. Going into 2024, we plan to reduce the investment cost for new builds by approximately $1 million, which will bring down our investment cost to around $6.1 million net of landlord allowances. At the same time, we are working on further refining our prototype with the goal of reducing our investment cost by another $500,000. Our long-term cadence in this business is to drive top-line sales in the 8% to 10% range through a combination of 5%-plus unit growth and comparable restaurant sales in the low- to mid-single digits. At the same time, we continue to expand margins through sales leverage and productivity and savings initiatives. Our continuous focus on optimizing the business and solid financial cadence generates significant free cash flow which we can translate into enhanced shareholder value. Based on our new restaurant performance, we know that BJ's is a welcomed concept by guests throughout the US, and this provides us the opportunity to double our footprint over time. However, as we've always said, we are going to do it with the right quality, and at the right investment cost to continue to drive strong, new restaurant investment returns that maximize shareholder value. To that point, and as we continue to focus on reducing our investment costs in our new restaurants, we now plan to open three restaurants this year. We are targeting total CapEx in the $70 million range, net of tenant improvement allowances, including remodeling at least 20 restaurants this year. We expect to generate over $40 million of cash flow this year that we can use to enhance shareholder value through share repurchases or debt reduction. Our strong EBITDA growth and free cash flow profile will provide solid earnings growth for our shareholders as we are increasingly confident in our strategy to grow sales, expand margins, open new restaurants at the right pace, and return capital to our shareholders. To this point, as we announced today, our Board of Directors has approved an increase of $50 million to our share repurchase plan.

Thanks, Greg, and good afternoon, everyone. I will provide details of the quarter and some forward-looking views. Please remember that this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. For the fourth quarter, we generated sales of $324 million, which was 6% less than last year on a reported basis and 2% higher when adjusting for the 53rd week and the $3.2 million from last year's gift card breakage. On a comparable restaurant basis, Q4 sales increased by 0.6% over the prior year. We averaged approximately $115,000 in sales per restaurant per week. Our strong and efficient restaurant execution, combined with cost savings from our margin improvement initiatives, helped BJ's improve margins in the quarter. Our restaurant-level cash flow margin was 14.4% in Q4, which was 150 basis points better than the previous year on a reported basis. After accounting for gift card breakage and the 53rd week, our restaurant-level cash flow margin was nearly 300 basis points higher than last year, showcasing the benefits of our ongoing initiatives to drive sales and efficiencies. Consequently, our dollars from restaurant-level cash flow continued to improve and aligned with 2019 Q4 levels. Adjusted EBITDA was $27.3 million, constituting 8.4% of sales for the fourth quarter. Q4 EBITDA exceeded the previous year by $8 million, and the margin was 220 basis points higher when again excluding the benefits from gift card breakage and the 53rd week from 2022. We reported a net income of $8.1 million and a diluted net income per share of $0.34 on a GAAP basis for the quarter, roughly twice the levels from a year ago, even before adjusting for gift card breakage and the 53rd week. As for sales trends, overall casual dining industry sales as measured by Black Box slowed beginning in November, and our sales patterns mirrored this industry trend. We made strategic decisions in Q4 to promote profitable sales, including altering our Veterans Day promotion, which positively impacted margins but negatively affected November comp sales. We also reduced promotional spending for off-premise sales starting in November, benefiting margins but reducing some off-premise sales. Our on-premise business remains our strongest, most profitable, and most distinct channel, with comp sales up low-single digits in the quarter. BJ's is an experiential brand, and we plan to focus primarily on growing our on-premise business. This is where guests enjoy the lively atmosphere of our restaurants, enhanced by our remodeling investments, top-notch service, fresh food from our kitchens, and innovative drinks prepared by our bartenders. We believe that creating a strong on-premise experience fosters greater brand loyalty, which will eventually benefit our off-premise business. Late night is our best performing daypart, with comp sales showing positive low- to mid-single digits in Q4. Our late-night offering is a core competitive advantage for BJ's. We have reinforced this time of day by adding more operating hours in 2023 and focusing on bar improvements in our remodel program, while continuing to serve innovative and creative foods and drinks. Regarding recent trends, restaurant sales in the first six weeks of 2024 have been significantly affected by storms and winter weather, along with a more cautious consumer. Each week has experienced some inclement weather that has kept guests at home. For the first six weeks, comp sales are down mid-single digits overall. Looking forward in the quarter, assuming the worst of the winter weather is behind us, we anticipate comp sales to improve, projecting full-year comp sales to be in the negative low-single digit area for Q1. Despite the tough weather starting the year for the industry, we continue to outperform casual dining trends compared to Black Box. In fact, our quarter-to-date comp sales are approximately 250 basis points ahead of the industry through the first couple of weeks of February. Turning to margins, we realized additional cost savings in the fourth quarter. We have successfully reduced costs by more than $35 million on an annualized basis, exceeding our original target by $10 million and enabling us to expand our restaurant-level margins to the mid-14% in Q4. Our fourth-quarter margins typically serve as a good indicator of our average margin throughout the year, and I would suggest using Q4 margins as a baseline for modeling full-year 2024 margins. We're encouraged by our ongoing progress in closing the gap to our 2019 restaurant margins of 16% and remain confident in our ability to meet and surpass historical margin levels. In terms of expenses, our cost of sales was 25.5% in the quarter, which was 130 basis points favorable compared to a year ago and 40 basis points favorable compared to the previous quarter. Food costs were down about 1% quarter-over-quarter, driven by new meat sourcing programs that reduced costs more than offsetting inflation on other items. Food cost inflation for the full year 2023 was approximately 1%, which would have been about 300 basis points higher without our savings initiatives. Labor and benefits expenses represented 36.5% of sales in the quarter, which was 30 basis points better than the fourth quarter of last year. We made further improvements to our labor efficiency, partly due to our simplified menu requiring fewer kitchen prep hours and many of the labor efficiency metrics we track showing better performance this quarter than pre-COVID levels. This reflects the high level at which our restaurant teams are operating and the effectiveness of our cost-saving initiatives so far regarding refining and optimizing our labor model. Occupancy and operating expenses were 23.6% of sales in the quarter, which was 10 basis points unfavorable compared to the fourth quarter of last year. We increased our marketing spending by 20 basis points from Q4 of last year to build more awareness and drive traffic to our restaurants. G&A was $21.7 million in the fourth quarter, which included over $600,000 in deferred compensation expenses related to fund performance in our deferred compensation plan, in contrast to a $100,000 benefit in Q3. This is a non-cash item and has a corresponding entry in the other income and expense line of our P&L. We also incurred extraordinary legal expenses of approximately $800,000 in the fourth quarter. The combination of these two items pushed our full-year G&A to $82 million, which was at the high end of our original guidance. Regarding the balance sheet, we concluded the fourth quarter with net debt of $39 million, which is $9 million lower than the end of Q3 due to our growing free cash flow. We ended Q4 with a debt balance of $68 million and a cash balance of $29 million, both of which increased from the end of Q3. During the quarter, we also continued to return capital to our shareholders through our share repurchase program. These repurchases demonstrate management's belief that BJ's shares are a strong value and reflect our confidence in BJ's long-term growth prospects. In the fourth quarter, we repurchased and retired approximately 263,000 shares of common stock at a cost of $6.7 million. Reflecting our robust and growing operating cash flow, the Board of Directors has approved a $50 million expansion of the share repurchase program. Thus, we currently have about $61 million remaining under our authorized $550 million share repurchase program. Total 2023 CapEx reached $98 million after accounting for related asset proceeds. This includes $5 million tied to the timing of payments for 2022 projects. Excluding this $5 million, our CapEx of $93 million was within our planned range, which also includes the five new restaurants opened in 2023 and 36 remodeled restaurants. In the fourth quarter, we closed an underperforming restaurant, resulting in a non-cash write-off reflected in the losses and disposal line under impairment of assets. As mentioned earlier, we expect Q1 comp sales to be in the negative low-single digits, partly due to the impact of the wet winter weather during the first six weeks of the quarter. Considering recent trends and our short-term expectations, we anticipate restaurant-level cash flow margins to be in the 13% to low-13% range in Q1, accounting for the pressures from weather-affected weeks. Nonetheless, we still expect to grow margins in Q1 year-over-year despite the top-line impact from weather. We then anticipate continued margin expansion throughout the year as we increase sales through strategic initiatives and further progress on our margin improvement efforts. Our goal is to close the gap to 2019 margins, aiming to end the year with an exit rate approaching 16% for restaurant-level cash flow margins. For 2024, we expect food cost inflation to be flat to low-single digits and labor inflation in the mid to upper single digits. We are targeting G&A to be in the range of $82 million to $84 million for 2024. We are limiting our planned CapEx to about $70 million, net of tenant improvement allowances, which includes three new restaurants and 20 remodels of existing restaurants. Consistent with the strategy laid out during our November Investor Day, we are maintaining a disciplined approach to capital allocation and new restaurant growth relative to new restaurant costs, with our overall restaurant economics guiding the timing for accelerated growth and related capital expenditures. This strategy is beneficial for BJ's, its guests, and shareholders while allowing us to utilize our increasing cash flows to enhance shareholder value through further share repurchases and debt reduction. Following our Brookfield, Wisconsin opening scheduled for April, the two other new restaurants planned for fiscal 2024 will feature our new prototype, which is designed to cost approximately $1 million less to construct than our more recent restaurants. In conclusion, with significant and improving cash flows from operations, expanding margins, and a healthy balance sheet, we have the flexibility to implement various initiatives to boost shareholder value. We are committed to delivering value to shareholders through our sales and productivity initiatives and disciplined capital allocation approach for both new restaurant openings and remodels, which continue to yield strong economic returns. We have a clear path ahead for sales and margin growth, and our long-term strategy along with strong consumer appeal for the BJ's concept positions us well to continue building on our successes in enhancing shareholder value. Thank you for your attention today, and we will now open the call to your questions.

Our first question today comes from Tyler Prause with Stephens, Inc. Please go ahead.

Hey, thanks for taking the question. Could you please walk us through the same-store sales components that include traffic mix and price? And how should we think about price flowing through in fiscal year '24?

Sure. So in the fourth quarter, we had around 7% to 8% of pricing, and that's about what flowed through to check a little bit less on check in the mid-7s. So traffic was down about 6%, so those are kind of the components that are built up to the 0.6% of comp in Q4. Looking forward to the 2024, we will be taking less price. So if you think of the pricing carried in Q1, it's more in the 5% to 6% range after a lower pricing round in January, and we expect that to continue to come down as the year progresses.

Great, thanks. And at the Investor Day, you mentioned an opportunity to grow your brand awareness as you were about 12% unaided awareness versus your peers said of about 20% to 40%. Can you talk a little bit more about what you're doing to close this gap into what we might see in 2024?

Yes, this is Greg. Great question. We will be actually increasing more on the media side, both on linear and connected TV in some specific markets. So last year, it really, at the end of the third quarter, was our first time going on television, actually even in Southern California in a few years. So we're going to end up having two flights; one in Q2, and then one in the second half. Our flights will start more in the April timeframe of this year. And we've actually added in another market as well that will be more on the connected TV, which is the Hulu and the streaming services versus linear TV.

Very helpful. Thanks. And just one final follow-up here. Appreciate the unit growth guidance of three units into 2024. How should we be thinking about closures for the year?

Yeah. And we're probably looking somewhere in the one to two closures for the year, as we continue to look at leases that are expiring or continue to make sure we want to optimize our portfolio. We've said this before, I think we've said at the Investor Day, BJ's has been a concept that has never gone out and opened 30 restaurants. And then three years later said, we're closing 20 of the 30. We've got a really good list of assets. And the ones that we've closed this year actually were coming to the end of their lease terms, or in one case, was one of our smaller restaurants. So as we continue to look towards next year, there's only a few that are coming towards the end of their lease term. And as a result, I think it would be one to two that we've closed.

Very good. That's all for me. Thank you.

Thank you.

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

Hey, thanks. Hey, guys. I wanted to dive in a little more of your capital allocation views and how you're weighing the various options at your disposal. Clearly, buyback is on the table with the new $50 million authorization. It sounds like you're continuing to push ahead to maximize the new store return profile for accelerating growth a bit more. So curious, some of the things you're looking at on that front to continue to drive the new store build cost down and drive a more profitable high-returning investment profile?

Yes, Alex. First, we started this year with two restaurants in mind. One of the bids for a restaurant came in higher than expected due to additional site work needed, so we decided to postpone that project for now. The other restaurant will feature a new prototype in the Arizona market, which also caused some delays. As we assessed the current consumer landscape, we felt it was better to let some projects slide into 2025 rather than rush them, allowing us to maintain stronger cash flow for share buybacks or debt repayments this year. We're also reviewing different design elements in our restaurants to identify areas where we can reduce costs, such as integrating more rounded areas instead of right angles. Through our analysis of the brand experience, we've recognized the importance of visual appeal, which distinguishes us in the market. We're committed to maintaining high standards and a diverse menu while also finding ways to lower costs. As we continue to develop BJ's, we are focused on creating a smart investment strategy that will ensure a solid return.

Okay. And on the remodels, I'm curious if you think the next batch are going to be as high returning as the 36 you did in '23, which were really good ones, I think.

I believe we have some promising remodels planned for this year, including several high-volume restaurants that have become dated. We want to refresh their appearance. As we review our over 20 remodels, they are chosen based on their sales performance, age, cash flow, and remaining lease duration. I am excited about these projects. We've learned from our remodeling efforts that enhancing the bar area and other visual aspects is more valuable than simply increasing booth capacity like we did previously. This approach allows for a more focused remodel that guests can appreciate, unlike some of last year's remodels that concentrated mainly on the dining area.

Got it. Thanks. Appreciate it.

Thank you.

The next question is from Brian Bittner with Oppenheimer. Please go ahead.

Thanks, guys. As we look back at the Investor Day in November, you did issue a long-term algorithm to grow your EBITDA by 12% to 15% annually over time. And as we look into '24, it clearly seems like you have the margin momentum in your favor going into this year. But this algorithm on the EBITDA, it's also predicated on low- to mid-single digit comps, which clearly are looking like there's just less visibility there. So when you kind of put together the puts and takes on '24, do you think it is positioned to be an algorithm year for EBITDA? Do you think we're safe thinking about the long term working in 2024?

I think regarding the November Investor Day, we need to focus on driving sales and improving margins to optimize new restaurant growth. The margin improvement initiative is working well, and we expect more savings this year. With our experienced team members performing better and supply chains stabilizing, we anticipate margin expansion and continued growth in EBITDA year over year. As we start this year, we've noticed weather impacts. In early January, there have been weeks where our comp sales were low single digits positive, but also weeks negatively impacted by the weather. For the fourth quarter, we've observed a slight slowdown in consumer spending, particularly among lower-income customers. This has resulted in reduced frequency of visits. Overall, I feel positive about our long-term business outlook, despite anticipating some challenges in the first quarter. If trends improve in the second quarter, that could help us return to single-digit comps and create further opportunities for opening new restaurants.

And, Alex, specifically, or sorry, Brian, I'll build on that too. In terms of the algorithm and the growth rate, I do think if we're starting from a $104 million of EBITDA in 2023, the run-rate margin that we're exiting is better than it was this mid-year and added on top with the additional margin benefits we're expecting and some sales growth too. I do think, in terms of the EBITDA growth you outlined, we still expect to be in a very healthy place there. It's just going to get there a little differently. The earnings growth algorithm is really based on both comparable sales growth as well as new restaurant growth. This year will focus much more on margin improvement, but it still puts us in a great place in terms of EBITDA growth. As we continue to build our pipeline and get new restaurant openings later, the earnings growth we see in 2025 and beyond will just have a slightly different look then.

Okay. Thank you.

Thanks, Brian.

The next question is from Aisling Grueninger with Piper Sandler. Please go ahead.

Hey, good afternoon. Thanks for taking my question. My question's on the remodel process. You said you're projecting 20 units this year and I believe at the Investor Day you're projecting around the same number is 2023, so north of 30 units. I'm just wondering why you've decided to remodel less units in 2024 than you previously guided, because you're getting a great sales lift from it? So just wondering if there's something unique impacting this and why not accelerate the number of remodels?

I'm not sure we stated that we would be remodeling the same number as before; I don't recall that. I remember mentioning over 20 at the Investor Day, and there hasn't been a change to that. During our capital planning this year, we didn't adjust our remodels downward. Perhaps I'm just remembering differently, but I didn't think we ever indicated we would do over 30 or 35 remodels next year. The difference from one year to the next stems from our current focus on the dining room and bar area, which involve larger remodels. At the Investor Day, we discussed three remodeling plans: expanding capacity, a concept we refer to as 'brewhouse theater,' and renovations in the bar area. This year, we want to concentrate on the brewhouse theater and bar, which are more costly but provide better returns. This is likely different from this year, when we executed many smaller remodels. I just don't remember saying we would reach over 30 remodels.

I believe the slide you are referring to is the one where we outlined our spending for 2023 and our expectations for 2024. In line with Greg's comments, the complex is going to look somewhat different. While the overall spending will not vary significantly, we intend to undertake fewer projects so we can concentrate on some more impactful remodels that enhance the bar. These remodels are more expensive, but they also tend to generate higher sales.

Thank you for that. That's very helpful. My other question is regarding the health of the consumer. In the prepared remarks, you mentioned that the first six weeks are experiencing a decline in mid-single digits. I'm curious if there is a significant difference between in-restaurant comparable sales and off-premise sales. Specifically, is off-premise affecting the quarter-to-date comparable sales like it appeared to do in the fourth quarter?

I believe there's still a trend in the business where the dining room is showing low single-digit growth compared to off-premise sales. Looking at the first quarter, it has made a significant impact on overall comparable sales, but it’s been challenging to assess the general situation. This weekend, we anticipate more rain in California, which we have factored into our guidance, approaching it conservatively. Throughout the quarter, there were weeks with positive comparable sales, but there were also weeks when much of the U.S. faced shutdowns, leading to notable negative comparable sales. Overall, I see the dining room performing better than off-premise. We’ve decided to reduce some marketing efforts related to third-party delivery, and while catering has continued to grow in double digits, the third-party delivery market has declined. At this point, we are hesitant to invest heavily in generating sales through that channel, as they are not as profitable compared to driving more business in the dining room.

Yeah, that makes sense. Thank you for the color. I'll pass it back.

The next question is from Jeffrey Bernstein with Barclays. Please go ahead.

Thanks, everyone. This question is for Jeff. I would like to explore the fourth quarter performance in more detail. How do you view your performance compared to internal expectations? Specifically, can you identify where you are noticing the most significant changes in consumer behavior? In the income group that is facing more challenges, is the change primarily related to traffic and visit frequency, or are you observing a shift in menu selections? Thank you, and I have another question after this.

I'll provide an overview. Tom can add more detail. Coming out of October, we experienced strong comparable sales in our industry and are continuing to exceed expectations. We made some strategic decisions this quarter regarding Veterans Day and other areas, which included reducing discounting. This approach has led to more profitable sales, although with reduced foot traffic. Looking at our restaurant guests, their ordering patterns remain largely unchanged, with no significant shifts in the dining room. However, we are witnessing a downturn in off-premise sales, where consumers are spending less than they did a year ago. Additionally, we've noticed that party sizes have slightly decreased year over year. When comparing Q4 of 2023 to Q4 of 2022, the group sizes that come into our restaurants are smaller. After COVID, we saw a significant increase in party size due to celebratory dining, but now it's starting to normalize, approaching levels similar to 2019. Furthermore, there has been a decline in visit frequency among lower-income consumers at BJ's.

I appreciate that. And maybe, Tom, just a quick one for you in terms of the COGS outlook, I appreciate the more stable inflation outlook in 2024. Can you just help us with the cadence through the year? It seems like there were a lot of inflation peaks and valleys throughout 2023 and I just want to make sure that we're not missing something big. Thank you.

Sure. On a sequential basis, we're not expecting much. If you think of past years where inflation has spiked in different categories, this year we're expecting a lot more stability through the year, partly because some of the items that usually have historically fluctuated for us, like our fresh meats, we're now able to lock them in for some periods of time and take off some of those peaks and valleys. So I think that would what we're starting the year with here, really where we ended Q4, is going to be pretty consistent through the year. I don't think we're going to see as much balancing as we did through the years coming out of COVID where you really saw it moving around.

Got it. I appreciate that color. Thanks, guys.

Sure thing.

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

Hey, good afternoon. I think, Greg, you said something in your comments about it's even harder to drive comps when you've rationalized the menu; I'm paraphrasing. But did you see an impact in the fourth quarter or so far in '24? I know it's been weather impacted, but what do you think the menu rationalization has done to sales? I know it's been good for margins.

I'm not entirely sure about that, Sharon. From my long experience in this business, I've observed that adding items can be beneficial for a while, but eventually it creates too much complexity and stops being helpful. That's when we start to see margins decline. During our analysis, we looked at reach and frequency, trying to balance both. Some guests come in specifically for a particular item that may not be central to our offerings, representing those marginal guests that we need to retain and provide alternatives for. Simultaneously, we have high-frequency items that truly drive our business. Our pre-launch studies indicated that the changes we made wouldn't necessarily lead to a higher average per person spend or more profitable items. We focused on determining which items could reach a wider audience while also being purchased frequently. I'm not sure I can highlight anything specific. Some data we analyzed showed that guests who had purchased a certain item and visited us multiple times continued to return even after that item was removed from the menu. This suggests that menu rationalization didn't directly reduce sales. However, based on my 20-plus years in this industry, I've seen that adding items usually increases sales—until it doesn't, at which point we realize we need to take action.

I'm curious if you were referencing any specific numbers from the quarter when you mentioned that. Do you have any data on how to use loyalty programs to encourage customers to return to the restaurants, especially those who may have stopped visiting?

Our loyalty program is strong, and we are focused on growing it. As we mentioned on Analyst Day, we can increase the frequency of visits from loyalty guests. For instance, if they normally visit every eight weeks, we can implement offers to encourage them to come every four weeks. The loyalty program is crucial for us, and we plan to keep emphasizing it throughout the year. In the first quarter, the business was significantly impacted by the weather, making it difficult to gauge our performance outside of those conditions.

Thanks. I could hear you. I'm in the Arctic Thunder of Chicago. I guess, one last question for me is you talked about pulling back in some of the promotions in the fourth quarter that weighed on comps. Is there anything notable we should think about as you're looking for margin that might weigh on comps here as we think about 2024 going forward?

No. There are just two significant areas. As I mentioned, we adjusted our promotions for Veterans Day and made a strategic choice by focusing on the consumer, considering the market trends, third-party delivery, and off-premise sales. You can either pay more each year to maintain your sales or find different methods to enhance your visibility in the marketplace. That's what we're currently addressing in the off-premise segment, which is a crucial part of our business. We're working on ways to boost takeout and encourage customers to choose that option instead of relying solely on third-party deliveries, where maintaining a $1 sale increasingly requires higher payments each year.

Okay. Thank you.

Welcome.

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

Thanks for taking my questions. My first question is about the unit growth profile. You're aiming for three units this year, focusing on exceeding $1 million, and you've developed an additional $500,000 from the prototype. As we work to finalize the prototype, could this impact 2025? Should we consider that if returns improve, 2026 might be the year we see unit growth return to the 5% level you mentioned?

Historically, our approach to building BJ's has been more measured, and I believe we have the potential to accelerate our growth into the 7-8% range. However, I don't think that removing three units will significantly impact our ability to reach 12 or 13 units this year or the next. It's important to note that our new restaurants are generating strong returns, with sales around $130,000 and margins in the upper teens. As we plan to build the next 200 restaurants, it's crucial for us to manage costs effectively, which will help us enhance efficiency and optimize our return on investment.

Okay. Thanks, Greg and Tom, one for you. You talked about generating the $35 million in annualized cost saves over the course of '23. How much of that carries forward as incremental into '24, helping to drive the margin story further? And as you're talking about the additional pool that you're attacking, I think your '25 went to '35. Are you working on another $10 million pool you're attacking? Or are we getting to really kind of more marginal opportunities for further cost saves from here? Thanks.

Thank you for your questions, Todd. To address your first question, regarding the 14.4% margin we achieved in the fourth quarter, we did realize some cost savings during that time. For instance, we found a new supplier for a couple of our sauces, which allowed us to reformulate and save a couple of million dollars on an annual basis starting mid-quarter. We also brought some janitorial services back in-house, improving service while saving costs. These examples of mid-quarter adjustments weren't fully reflected in our Q4 margins. The impact of these benefits will be more pronounced when they are applied over a full quarter or year. The $35 million in cost savings we discussed is on an annualized basis, with some savings already in place for the full year, while we continued to realize many of them throughout 2023. Regarding your second question, we still see significant opportunities for additional cost savings. There's a possibility of another $10 million in savings, and we're evaluating several million-dollar-plus savings opportunities. Our team remains focused on this initiative. We continue to discuss it internally and with you all regularly. We are still uncovering valuable savings, although some initiatives may take a bit longer to implement. We expect to see some of these roll out in Q1, and as the year progresses, I am excited about finding even more savings.

Great. Thanks, Tom. Appreciate it.

Thank you.

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

Thanks. I'm sorry if I missed this, but did you guys guide G&A for '24? And then what do you guys expect the marketing expense to be in '24 as a percentage of sales?

So we did talk about G&A being around $82 million to $84 million for the full year, and then marketing will be somewhere around 2%. That will be up slightly from this year, which I think was upper-1s. But we've talked about this at the Investor Day, actually, I think, Nick, just in general. And that is, last year, we had to spend money for production and some other assets that we can use this year. So while marketing will be up a little bit from a percentage of sales standpoint, it will be deployed differently because we have those assets already owned, which means we can deploy them in linear, connected TV, and social, digital, et cetera.

Got it. Now that you're mentioning low-13% unit level margins for Q1, could you talk about the different line items where you anticipate leverage and how we can achieve a margin of over 14.5% for the year?

I would point to Q4 as being a good proxy for a full year. So coming out of this year looking at kind of a mid-14s right now, we're expecting on the food cost line to see pretty moderate inflation. We're expecting a little more on the labor side. So as we take pricing, I would expect to get a little leverage on the food cost side, being able to hold on the labor side, but I would look at Q4 as a really good proxy to use.

Okay. Thank you.

Thank you.

Excuse me, this concludes our question-and-answer session. And the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.