BJs RESTAURANTS INC Q2 FY2024 Earnings Call

Good day and welcome to the BJ's Restaurants Inc. Second Quarter 2024 Earnings Release Conference Call. All participants will be in a listen-only mode. After today's remarks, 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 2024 second quarter investor call and webcast. After the market closed today, we released our financial results for our fiscal 2024 second 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 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 the 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 by 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 has delivered another quarter of restaurant-level margin growth and adjusted EBITDA growth of 13% over the same period last year. These solid results again highlight the benefits of the strategies we've shared at our Investor Day in November. Our approach focuses on driving sales through our freshly made brewhouse fabulous culinary initiative, increasing and enhancing our brand awareness, improving our operational excellence through our people initiatives centered on our gracious hospitality, and enhancing our ambiance through our remodel initiative. Additionally, our holistic top-line approach to driving sales has complemented our margin expansion initiative through productivity and cost savings enhancements. These strategies are working and continue to establish a solid foundation for financial and restaurant growth and the enhancement of shareholder value. We finished the quarter with total sales of $349.9 million, while comparable sales were slightly negative at 0.6%. However, throughout the quarter, we saw month-over-month improvement in comparable sales, driven by guest affinity for the BJ's concept and choosing BJ's to celebrate important moments like Mother's Day, Father's Day, and graduations, reflecting the strong guest affinity to the BJ's name; 107 restaurants broke either daily or weekly sales records in Q2. Furthermore, our restaurant margins continue to expand and rose to 15.5%, representing an increase of 100 basis points from the prior year. Our restaurant-level cash flow per operating week was approximately $19,200, just slightly behind fiscal 2019's restaurant-level cash flow per week of $19,300. So our percentage margins were still behind 2019 levels. We closed the gap on the dollar per restaurant week. Adjusted EBITDA in the quarter rose to $36.1 million, an increase of $4.3 million or 13% higher than the prior year. Our teams did an amazing job focusing on driving throughput in our restaurants this past quarter as we rolled out the second phase of our gracious hospitality people initiative. If you recall, the first part of this initiative focused on new server scripting and was launched last year. In April, we initiated our enhanced service model, which balances the number of tables per server, food runners, and quality expeditor positions in our restaurants. These changes allow servers to get to our guests sooner, so we can get orders into the kitchen and the bar faster. It also frees up our managers, so they have more time to be in the dining room to ensure we are delivering the gold standard level of operational excellence for our guests. And it elevates table turnover, which in essence expands the capacity of our existing platform. The goals of these changes are to improve our pace and throughput in our restaurants and further improve our already high standards of service and hospitality. Based on our consumer research, we know that pace and throughput is another opportunity for us that will drive top-line sales. In addition to enhancing our service model, we are also evaluating and testing other technological enhancements that will help us further improve throughput in our restaurants. These include changes to the way our kitchen display system informs our teams when to fire or begin kicking in items and changes to our server tablets. I want to thank our team members for diligently implementing these service model changes. There was a large undertaking, and our teams executed flawlessly knowing that these changes deliver a better guest experience, which ultimately continues to drive top-line sales. Our next gracious hospitality phase will include new hourly training for all restaurants, which is expected to roll out later in Q3 and Q4. This will include additional side-by-side training for all new hourly team members. Overall, we continue to expect these initiatives to take up the better part of Q3 and Q4 this year and have a slight impact on training labor for these quarters. These investments in our team are critical elements to driving top-line sales since every additional sales dollar leverages the fixed elements of our restaurant's cost structure. As we have said on past occasions, the best way for us to improve our restaurant-level cash flow is by driving sales, and we have a proven playbook and strategies that are helping us meet this goal. We also continue to execute against our remodel initiative that is similarly driving improved sales and traffic. We’ve now completed 19 remodels year-to-date and we expect to do approximately five more this year. By the end of this year, we will have remodeled approximately 70 restaurants since we began this initiative. We will finish fiscal 2024 with approximately half of our restaurants either recently remodeled or one of our newer prototypes. With the success of our remodel initiatives, we have been effectively and prudently deploying capital. To date, we have opened one new restaurant in Brookfield, Wisconsin, and we expect to open our next two restaurants in August and September of this year. Both new restaurants will feature our new prototype that will cost approximately $1 million less to build, bringing the investment cost down to around $6 million on average, and that's net of landlord allowances. This new prototype also provides greater operating efficiencies and higher and faster returns, while incorporating our learnings from our remodel initiative, which includes lighter colors and a more contemporary bar featuring the 130-inch television as the focal point. Our long-term model for our business continues to be 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. However, as we've communicated previously, we are going to do so with the right quality and at the right investment costs to continue to drive strong new restaurant investment returns that deliver shareholder value. 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 our solid financial cadence results in significant free cash flow, which we will translate into enhanced shareholder value over the medium and longer term. Now let me turn it over to Tom to provide a more detailed update for the quarter and the 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 risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. For the second quarter, we generated sales of $350 million, which was slightly higher than last year. On a comparable restaurant basis, Q2 sales decreased by 0.6%. From a weekly sales perspective, we averaged more than $124,000 per restaurant. Our strong and efficient restaurant execution, as Greg just outlined, in conjunction with cost savings for our margin improvement initiatives, helped BJ's again improve margins in the quarter. Our restaurant-level cash flow margin was 15.5% in Q2, which was 100 basis points better than a year ago, demonstrating again the benefits of our ongoing initiatives to drive efficiencies and the solid foundation we have built for continued growth. Adjusted EBITDA was $36.1 million and 10.3% of sales in our second quarter. Q2 EBITDA grew by 13% year-over-year and beat the prior year by more than $4 million with a margin that was 120 basis points higher. We reported net income of $17.2 million and diluted net income per share of $0.72 on a GAAP basis for the quarter, which were each up more than 40% from a year ago. As Greg mentioned, our comparable restaurant sales improved sequentially through the quarter and finished with a modestly positive comp in June. During the quarter, we set a new weekly sales average record at more than $141,000 across our system in the week that included Mother's Day. Also, we mentioned last quarter, we have been scaling back the degree of menu pricing compared to last year. In May, we only took a small pricing round of approximately 40 basis points, which was more than 200 basis points lower than our Q2 2023 pricing round, leading to a comp headwind in the quarter as we lap last year's elevated pricing round. The foundation we are building is allowing us to take a more balanced pricing approach to maintaining our traffic by providing value while adding appropriate menu pricing to deliver profit dollar growth. Our check growth moderated to the mid-2% area in Q2 compared with the mid-4% check growth in Q1. This was driven by our carried menu pricing in the mid-3% area in Q2, down from the mid-5% area in Q1. Moving to expenses, our cost of sales was 25.7% in the quarter, which was 20 basis points favorable compared to a year ago and 50 basis points unfavorable compared to the prior quarter. Food costs increased by more than 2% quarter-over-quarter driven by inflation on key items such as bone-in chicken wings and avocados. Labor and benefits expenses were 36.1% of sales in the quarter, which was 10 basis points favorable compared to the second quarter of last year. We achieved these gains while introducing a new service model to provide guests with an even better restaurant experience, as Greg just outlined. This rollout added one-time costs related to training and extra scheduled labor, which impacted margins by approximately 20 basis points in the quarter. Occupancy and operating expenses were 22.7% of sales in the quarter, which was 70 basis points favorable compared to the second quarter of last year. We continue to achieve strong efficiency gains over the prior year from our cost savings initiative and expect further improvements in the second half. G&A was $20.6 million in the second quarter, in line with our expectations. Turning to the balance sheet, we ended the second quarter with net debt of $47.3 million, comprised of a debt balance of $63.5 million, less cash and equivalents of $16.2 million. During the quarter, we repurchased and retired approximately 255,000 shares of common stock at a cost of $8.8 million. We currently have approximately $52 million available under our share repurchase program. Moving to more recent trends, comparable restaurant sales started the quarter modestly positive. Our sales building initiatives, including recent promotions, have been successful at driving incremental traffic, as illustrated by our traffic performance far exceeding the casual dining index in early Q3. Dollar profit growth is our top success criteria for any promotion. We are very encouraged by the incremental profit flow-through we have been able to generate with recent promotions, including our Pizookie Pass. Looking ahead and assuming recent trends continue, we expect Q3 comparable sales in the 1% to 2% range, taking into account recent check and traffic trends and anticipating a regular seasonal pattern. As a reminder, our third quarter tends to be our lowest sales quarter of the year due to seasonality. Factoring in recent trends and expectations for Q3 comparable sales, we expect restaurant-level cash flow margin to be in the mid-12% area as we continue to expand our margins over the prior year. This guidance incorporates a higher level of marketing investment to build additional brand awareness and drive traffic to our restaurants, as we noted in last year's Investor Day presentation. As a percentage of sales, marketing costs will be approximately 50 to 70 basis points higher than Q3 of 2023. Also, food cost inflation has stepped up on certain items recently, which is reflected in our third quarter guidance. We expect G&A to remain in the $20 million area for Q3. G&A continues to track toward the higher end of our original full-year guidance range of $82 million to $84 million and to the lower end of the guidance range with approximately $2 million of extraordinary G&A expenses moving from Q1, which were previously discussed. Much like Q1 and Q2, as well as our guidance for Q3, we expect margins to continue to expand in Q4 year over year as we grow sales through the strategic initiatives we've outlined and make additional progress on our margin improvement initiatives. In terms of cost savings, our new disposables distributor will be fully rolled out by the fourth quarter. We're also testing a tool for our restaurant operators that uses our AI-based sales forecast at each restaurant and generates a tailored labor schedule down to the hour and day based on expected demand and other criteria that we set. The early results are encouraging and we expect to expand the usage of the tool by the fourth quarter and drive additional labor efficiencies. Our goal remains to close the gap to 2019 margins by year-end. In conclusion, with significant cash flow from operations, expanding margins, and a healthy balance sheet, BJ's has the financial flexibility to execute multiple initiatives to enhance shareholder value. Specifically, we are focused on delivering value to shareholders through sales and productivity initiatives and through our disciplined approach to capital allocation, including new restaurant openings and restaurant remodels, which both continue to generate strong economic returns, as well as our share repurchase activity. We have a clear path to sales and margin growth ahead in our long-term strategy, and the 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 time today, and we'll now open the call to your questions.

Thank you. And we will now begin the question and answer session. Our first question today will come from Alex Slagle with Jefferies. Please go ahead.

All right, guys. Thanks. I want to see if you can talk more about your experience through the May and June holidays, both in terms of consumer demand and starting that special occasion dining piece. And then also just your experience driving throughput. I mean, I guess it's early stages as you're rolling out the elements of the new service model. Just any early learnings from what you saw there during those Mother's Day, Father's Day, and graduation periods?

Yes, good question there, Alex. As we've kind of mentioned in the call, we saw improving trends throughout the quarter coming out of April into May and June. I would say that around the holidays specifically, there was definitely demand within our restaurants driving traffic and average check as consumers came out to celebrate. Mother's Day, Father's Day, and graduation weekends were strong for us. We mentioned setting those records. As Tom mentioned, we did over a $141,000 weekly sales average. So when there is, and we said this before, when there is a reason to dine out for celebratory events, consumers come out; they want to go out and celebrate. There's an emotional attachment to coming to sit-down restaurants. I think BJ's provides that for many consumers, and that's what we saw in our business. In regards to your second part of your question, we're at the very beginning. We have those inefficiencies that we had to go through. You think you understand our restaurants and the size of our restaurants to put more servers on and require more hiring that we had to do. And in one sense, it ends up being sometimes more people in the kitchen running and grabbing food and working those transitions out. What we do know is when we get to our guests sooner, and we get that first order in sooner, our net promoter scores go up; they have a better dining experience with us. And that's one of the main reasons for having more servers on. We know if we get their food in faster, obviously the entire experience should be faster. I would say on this specific initiative, we are probably in the second or maybe the top of the third inning, so there's a lot more for us to do. A lot of it comes down to the teams getting even more and more familiar with this process and getting their sea legs under them. We continue to monitor it in regards to how we are doing on our productivity. I think myself and our operations team are excited because it really unlocks the throughput in our restaurants and makes us more productive. We're going to continue down that path.

Great. And just a question on the Q3 same-store sales outlook and maybe the quarter-to-date. Are there any dynamics with the calendar shift, like the 4th of July holiday moving around? And then potential dynamics at play with the Olympics and elections and things like that that you're looking out for?

Yes. Look, I'll give you my perspective on this. Really, where we are right now, as Tom mentioned, 1% to 2% seems to be our regional guidance. The calendar itself is not great in the sense that you have July 4th moving to Friday, so moving into the weekend. We had the hurricanes impacting our numbers there. It will obviously go through the quarter but becomes less impactful. At the same time, we said this before; political conventions are not great for dining out as a certain number of consumers always want to see certain people speak at conventions. This can lead to challenges during the middle of the week, and the Olympics, specifically the opening and closing ceremonies, can also be more challenging because people are interested in viewing those events. That said, if you take those out and look at our underlying consumer, it's pretty consistent with what we saw in Q1. The lower-end consumer year-over-year, around the $50,000 range, has kind of reduced their purchasing. We continue to see that aspect of it. But looking into Q2 versus Q1 and now Q3, we're not seeing any real change in the consumer; we just have to be wary of the calendar.

Got it. Thank you. Good luck.

Thank you.

And our next question will come from Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you very much. Two questions. The first one just following up from a comp perspective because it does look like you're saying in July you were modestly positive. You're assuming a 1% to 2% for the full quarter, seemingly a little bit of an uptick. I was wondering if you could talk about maybe the industry backdrop behind that, because it does seem like peers are being more aggressive with value offers and it does seem like broader industry trends are slowing. So just wondering how you think about the outlook for the rest of the quarter and within that, just California in particular. We've now heard from a variety of restaurants that they've actually seen a pretty significant pullback in California, and many consumers are being more cautious due to price increases that maybe some of the fast-food chains have been taking. So I'm wondering if you've seen any change in your California performance in recent months relative to the rest of the country. And then I had one follow-up.

Yes, Jeff. I'll take that; there's a lot there. So I'll take some. I think Tom can probably talk a little bit more detail about how we're thinking about comp sales in the quarter as well. To take a step back on California, I think we started in April, it is slowly moving back. There are two things I think that played into this for consumers. You mentioned one of them: the California minimum wage put sticker shock across all consumers, whether dining in casual dining or QSR fast casual restaurants. The fact of the matter is that different dining occasions come into play here. If you went to one place and saw that it seemed expensive, you might reduce your spending elsewhere. I think that initially played into consumers as they had to adjust to it. I also believe — and it seems strange being a Californian — that California in 2023 experienced what they call historic rains, even though we felt like we have the same rains in 2024. As a result, tax returns were delayed until September of 2023. So this year, everybody in California had to file their taxes in April, while they didn't have to last year. That, on top of maybe the minimum increase, could have impacted California consumers early on. A bit of that goes into our thinking about how comp sales will play out through this quarter. Most people in California have already paid their taxes, and September might not be a drag as it was a year ago. We continue to monitor that landscape, and regarding value, the issue becomes more challenging in driving comp sales, not so much value but the amount of media and marketing dollars that people are spending to clarify that message. You are competing for your voice to be heard with consumers, which is one of the reasons why we will be increasing that marketing spend versus quarter-over-quarter from a year ago. We need to be heard from the consumer standpoint to ensure they continue to come to our restaurant, so we can leverage that additional sales. It was part of actually our plan all along; it was to step up in Q3, but it's probably worth about 20 to 30 basis points more than what we were thinking before as we enter this quarter. Tom, I don't know if you have anything to add.

Yeah, Jeff, you asked specifically about California, and we're not seeing any different trends. We've been stronger in California which we're lapping. But as we look across the dynamics in our markets, there’s nothing noteworthy in California. If we look to black box, we’re used to outpacing the industry in our home turf. So nothing really to report. One other thing: Greg mentioned a lot of the moving parts in California; gas prices have come down a bit, too. So when you think of disposable income in the consumer's pockets, I think we're seeing that tailwind coming right now.

Understood. And then my follow-up is just on the unit opening side. I think you mentioned you did one this year. So far you’ll do another two, so that’ll get you to three for this year. But I know, Greg, you mentioned the long-term algorithm. The ideal scenario would be to get to mid-single-digit unit growth. With remodels, presumably, as you’re saying, you’ll have half the system at or close to the new prototype by the end of the year. So I’m just wondering how you think about 2025. I know you haven't given formal guidance yet, but presumably, you have some line of sight into openings for next year, whether next year is a year of a big uptick from the three to get you anywhere close to that kind of 5%, which presumably you'd need 10 or more. So any thoughts around the unit growth outlook looking into 2025 or when you think you’d get to that kind of 5% level? Thank you.

Yeah, great question. So we continue to build our pipeline. We've said consistently at BJ's that getting back to 5% was never going to be a one-step forward, just because we want to make sure we do it with quality. So, to get to, if you think about it, being 10, 11, 12 restaurants, our goal will be to stair-step that. We'd have to see 5 and then 7 to 8 and kind of move ourselves in that direction to ensure that we're bringing in the right quality regarding people. We will evaluate where we want to go next year as we continue to build our pipeline. Our focus is on ensuring that the two new prototype restaurants we’re doing right now hit their returns. When we get into really late September, I guess toward the end of this quarter to October, we’ll have more of our plan put together. That plan goes to the board for board approval, so we’re kind of working through it that way. But we continue to build our pipeline. For us to get to 5% growth would come about in 2025 or beyond as we continue to stair-step up from our current run rate of three.

Understood. But it seems like you're on the path to at least an absolute number greater than three next year, if you're even having anywhere toward that like you said, stair-step?

That's right. That is within our plans, but we continue to evaluate that against remodels because it comes down to how we can utilize our cash flow in numerous ways. One option is remodels, as we indicated, but obviously building restaurants and enhancing shareholder value is key. So ultimately, as remodels come down, as we’ve mentioned over time, there's additional capital that can be funneled into trying to stair-step growth for restaurant openings or, in the short term, for share repurchases. That’s what we would do as well.

And our next question will come from Todd Brooks with The Benchmark Company. Please go ahead.

Hey, thanks for taking my questions. Just two quick questions, if I may. One, Tom you talked about closing the gap to 2019 restaurant-level margin levels by year-end. Can you just elaborate on what you're meaning during Q4 of 2019? I think it was a 16% margin quarter for you. Can you kind of put a framework around this, so that we understand the magnitude in restaurant-level margin recovery you're looking for in that quarter?

Sure. And we would give more specific guidance for Q3, but as we look forward into Q4, there's going to be a need to see our business backdrop at that time. We want to grow year-over-year, but we want to ensure that we get as close to historic margins in 2019 as possible. We have seen with the current backdrop what we want to do remains the aim is to get above last year's levels and something closer to where we were in 2019.

Yeah. I think the big wildcard we continue to look at is really on the commodity side. Even as we go into this third quarter, commodities are inflating more than we originally expected, and I took this into account with our guidance. The additional marketing that we discussed will also have an impact depending on how those commodity prices evolve in relation to margins in the fourth quarter.

Great. And my second question, Greg, you were talking about the throughput initiative and its progress. Can we discuss where you stand now on table turns at peak periods relative to before you started the initiative? Can you frame up the magnitude of how much you would look for table turns to be improving from this?

Yeah. That’s a great question. I actually don’t have our table turn information in front of me, especially at the peak periods, but it's about expanding the shoulder times. You know that when you go to BJ's and it’s not an all-in five-hour dinner experience. We want to reduce that to something more around 45 minutes, give or take a little. We know some of the areas that we have an opportunity. And believe it or not, one is the pay-at-the-table process. We know in a couple of restaurants implementing this process saves anywhere from seven to ten minutes on the experience. We realize that when our servers reach the guests sooner, the time spent in that format saves three to four minutes. We’re also looking at our kitchen display system and where things are lined up for firing. If it comes out at the same time, there are several areas where we can cut down that time by one to three minutes. We want to work on speeding up overall cook time, rather than purely on the table turns. We made specific changes for Mother's Day and Father's Day because you have guests coming in from prior guests. Not only were we able to grow average check on those days, but traffic also saw a significant increase due to adjustments. That is the goal we want to continue fulfilling over the next couple of months before broader rollouts.

That's great. Thanks. I’ll jump back in the queue.

And our next question will come from Nick Setyan with Wedbush Securities. Please go ahead.

Thanks, guys. So just want to walk through Q3 and Q4 menu pricing expectations.

Sure. So the — we’ll have another round of pricing in late September of about 90 basis points, and that's rolling over something in the 2% area from a year ago. So as we walk through, Q3 will be in the mid-low 3% area, and then in Q4, we’ll carry kind of mid-2%. The timing works in terms of rolling-on and rolling-off pricing.

Hey Nick. The other thing just from a bigger picture is that we've seen throughout this year is a slight negative mix shift dragging on our total pricing. The reason for that is we're seeing improved traffic and sales trends at late-night and mid-afternoon, which leads to a lower average check than what we're seeing at dinner time. We expect that mix to continue.

Got it. That was a 40-60 basis point uptick in terms of the year-over-year marketing and does that continue into Q4 as well? Are we expecting elevated levels of marketing in Q4 versus 2023 Q4?

It balances out more in Q4. It’ll still be a little bit up, but nothing like Q3 year-over-year.

The COGS inflation commentary, I mean, is that just mainly cheese? What else is going on?

Right now, the two big ones are bone-in chicken wings and avocados. Those are the two that are driving the inflation because, you know, a lot of our food is fixed for the year or the quarter. There are certain produce items, and some of our routes float to market. So those are two areas we have seen steps up. We will also be, as we step into Q3, on the new meat contracts, so if we look year-over-year, we're still seeing some really nice savings in red meat, but we have contracts that allow us to fix that for some periods of time. We’ll see that resetting in a month or so, so there may be a little tick-up there.

Okay. And then I guess, like in terms of just labor, it sounds like maybe a little bit less leverage than we were expecting going into this quarter. Is that simply just the spending around the labor training investments?

Yes. I mean, Tom, on labor, we saw some improvement but kind of lost it due to the inefficiencies of the new system, but I would say that our labor efficiencies looking significantly better in July for us. From that standpoint, we want to make sure again we are taking care of the guests, driving top-line sales through the systems that were put in place, but this is about driving throughput and improved sales and hospitality. After improving guest service, we feel we can provide improved productivity.

Thank you very much.

You're welcome.

And our next question will come from Sharon Zackfia with William Blair. Please go ahead.

Hi, good afternoon. Can you talk about the labor environment? I know in California you are worried that you might see an uptick in your labor costs. I know you're not directly impacted by the FAST Act. I'm also curious, just broadly across the country, are you seeing better quality labor? I know there's increased labor availability, but I'm wondering about the quality of the labor that you're getting.

Sure. I'll take that one, Sharon. Yes, we mentioned this last quarter. We didn't mention it this quarter so I can bring it up now. We continue to monitor our labor situation in California, assessing our retention rates to ensure that with the California fast act and the minimum wage increase, we are not seeing any changes in turnover rates or wages. I'm happy to report that we're tracking year-over-year and back to 2019 levels. Both California and the rest of the system are still better off than we were then. In terms of wage growth, we discussed food cost inflation, but in terms of hourly base wages, we're still sitting in that 3% to 4% range, consistent with Q1. There hasn’t been much in the way of wage inflation from Q1 into Q2. Overall, all signs are pointing to a successful situation as we've given increases to certain elements of our restaurant, but it has all balanced out, and we’re seeing really good retention rates. As for quality, the longer team members stay with us, the better execution we see. We have fewer reasons to hire all the time. So I think the pool out there is stronger, and we're able to retain our team members more effectively. I would say it is a better labor hiring environment than we have seen in the recent past.

And then, Greg, just a question. I know you haven't committed to when you're going to re-accelerate growth, but how far in advance of an acceleration do you have to start building the management pipeline?

Yeah. Somewhere in the 12-month timeframe is what you really have to consider. The challenge with the pipeline is a bit different. For instance, in the Chicago market, building that manager pipeline is going to be more challenging, so we want to be more ahead of that in the 12-month timeframe to ensure the team understands BJ's well. Building restaurants in Texas, California, or Arizona, some of those markets, allows for a shorter pipeline timeframe. On average, you're looking at a minimum of six months, but around 12 months is more realistic.

Okay. And then last question for me, there was kind of a big jump in other income in the quarter. Was there something unusual in that income, or what was the reason for this $2 million sequential increase?

Yeah, there was an out-of-period release related to some tax credit accruals. We’ll detail that in the queue, but that’s an out-of-period benefit there.

Okay. Thank you.

You're welcome.

And our next question will come from Jon Tower with Citigroup. Please go ahead.

Hey, this is Karen Holthouse on for Jon this evening. Just two for me. One, it looks like NICS is still running a little bit negative. Is that still being attributed to just a shift in day parts with late-night coming back? Or is there something new that's contributing to that regarding check management? And then just the Pizookie promotion; how should we think about the accounting behind that? Is the giveaway of free Pizookies going to be reflected in that spike in advertising spending? Or would it show up as part of a sales cost dynamic?

Sure. On the check side: we actually saw that gap shrink into Q2. We are still seeing better comp dynamics in our late-night daypart, and there is about a $10 average check difference that’s lower in late-night. So while it’s great we’re growing traffic, there is some check headwind to that as it averages in. The other piece is alcohol, where we check it year-over-year as well as back to 2019, and we’ve continued to see some headwind in terms of what was sold last year—it's more normalizing back to 2019 levels than anything else. So those are the two main pieces that are the delta between our check growth and pricing dynamic. Up to your second question about the Pizookie promotion: there’s a modest amount of sales income we take when the membership is paid for each month, but it will mostly reflect in the cost of sales. The concept we’re seeing is that most of these customers will come in and spend on whatever they want to eat and, plus they’ll get their Pizookie for free. So we’ll have the sales for the rest of their meal, while the Pizookie will just flow through as comp sales. So to that point, that type of promo drives traffic into our restaurants, and as Tom mentioned, they end up with a free Pizookie with their meals. So that leads to a lower average check. We expect that mix to continue to be negative in Q3 like it was in Q1 or Q2. However, we gain increasing frequency and guests, which helps drive throughput in our restaurants.

Okay. Cool. That's everything for me.

Great. Thank you.

Thanks.

And this will conclude our question-and-answer session. Also concluding today's call, we’d like to thank you for attending today's presentation and at this time, you may now disconnect.

Thank you, everyone.

Thank you.