Earnings Call Transcript - BJRI Q3 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the BJ's Restaurants, Incorporated Third Quarter twenty twenty one Earnings Release and Conference Call. Today's conference is being recorded. At this time, I turn the conference over to Greg Levin, Chief Executive Officer and President. Please go ahead.

Greg Levin, CEO

Thank you, operator. Good afternoon, everyone, and welcome to BJ's Restaurants fiscal twenty twenty one third quarter investor conference call and webcast. I'm Greg Levin, BJ's Chief Executive Officer and President. And joining me on the call today is Tom Houdek, our Chief Financial Officer. We also have Kevin Mayer, who has taken on the new role at BJ's as our Chief Growth and Brand Officer; and Greg Lynds, our Chief Development Officer is also on hand for Q&A. After the market closed today, we released our financial results for the third quarter of fiscal twenty twenty one, which ended Tuesday, September twenty eight, twenty twenty one. You can view the full text of our earnings released on our website at www.bjsrestaurants.com. Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives and then Tom Houdek will provide some commentary on the quarter and the current environment. After that, we will open it up for questions.

Rana Schirmer, Director of SEC Reporting

Thanks, Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of nineteen ninety five. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today's date, October twenty one, twenty twenty one. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise, unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission.

Greg Levin, CEO

Thanks, Rana. As discussed on our Q2 call back in July, we entered Q3 with optimism, as the country showed several signs of emerging from the pandemic. Our weekly sales average during the four weeks of July surpassed one hundred and seven thousand, which was one point four percent higher than sales levels from the same period in twenty nineteen. We noted that labor was our biggest near term challenge to realizing the true sales potential of our overall platform. Realizing the strong demand for and appreciation for the BJ's concept, our teams were focused on ramping up staffing levels so we could accommodate even more guests as the third quarter progressed. However, beginning in August, with the spread of the COVID-19 Delta variant, casual dining industry comparable sales took a step backwards and declined approximately three hundred seventy basis points in August from July's comparable sales level versus twenty eighteen as measured by Black Box. During the same period, BJ's outperformed the industry, as sales declined approximately two hundred and sixty basis points over the same weeks. In addition to consumers pulling back on their dining occasions, staffing levels became more challenging in August and September, as increased team member exclusions related to COVID cases resulted in reduced seating capacity and limited hours. During the quarter, over twenty percent of our restaurants were placed on limited menus due to both staffing and supply chain shortages. Throughout this time, our goal was to ensure our team members were taken care of and that we delivered a gold standard level of execution to our guests. We understand that at times these conscious decisions sacrifice short term sales by limiting restaurant seating and capacity, as well as menu items. However, in doing so, we know that the guests that are in our restaurants are getting the service, hospitality and food quality that they expect and will keep choosing BJ's over other concepts. As a result, third quarter comparable restaurant sales finished down zero point five percent compared to the same period in twenty nineteen, which reflects the deceleration from one point four percent of positive comps in July to negative one percent in August and negative one point seven percent in September. At the same time, supply chain issues that were already stressed before the summer felt more acute pressures from staffing and transportation that caused certain foods to increase further, particularly fresh meats. This caused a rapid rise in commodity food cost mid-quarter, which resulted in lower than anticipated restaurant operating margins. In addition to the industry wide sales pressures, BJ's also lapped a period with heavy promotion in twenty nineteen. We promoted a three dollar Pizookie deal throughout September twenty nineteen with TV support. Because of the capacity limitations related to current staffing levels, our media spend per restaurant was forty percent lower in the third quarter of twenty twenty one as compared to the same period in twenty nineteen. As we said on the Q2 call and as I just reiterated, staffing remains our number one opportunity to drive near term sales growth. We continue to see a direct benefit to our comps at restaurants with higher staffing levels. Towards this goal, our restaurants nearing their twenty nineteen staffing levels increased to approximately half of our system at the end of Q3, that's a ten percentage point improvement since the end of the second quarter. Importantly, restaurants that were closer to twenty nineteen staffing achieved comparable restaurant sales of more than five percent over twenty nineteen levels and continued to drive positive comparable restaurant sales into October. Conversely, about a quarter of our restaurants were twenty percent or more behind twenty nineteen staffing levels and have had high-single digit percentage comp sales decline in the third quarter compared to the same period in twenty nineteen. Excluding those restaurants, our comparable restaurant sales for the quarter would be positive low-single digits. I'm sharing this data and perspective because while our typical growth drivers revolve around menu, sales building initiatives, and new sales channels such as off-premise and our Beer Club, our current number one priority and the one that will quickly reverse the margin percentage impact on labor and other cost had on Q3 is sales. It's fully rebounding our staffing, as this challenge posed a more significant headwind on traffic and sales during the third quarter than it did during the first half of this year. Additionally, our restaurants that were closer to fully staffed and able to drive positive comparable restaurant sales in aggregate had restaurant level margins that were over one hundred fifty basis points better than our understaffed restaurants. So despite the current pandemic-induced inflationary pressures on our business, the restaurant business still has a high degree of fixed and semi-fixed costs that are very leverageable by driving top line sales. Looking to the future, I remain incredibly confident in BJ's ability to return to industry leading results because of four key factors. One, our differentiated concept and ability to execute at the gold standard level; second is our team members and the BJ's culture; third is our guests' affinity to our brand offerings, value, and hospitality; and fourth, our very significant near and long term restaurant growth opportunity. First, our differentiated concept execution; we are unmatched in the industry, given our polished casual positioning, best-in-class bar statement, and AUVs approaching six million dollars on an average guest check in the mid- to high-teens. The way our concept is designed allows guests to visit BJ's for lunch, mid-afternoon, dinner, and late night. There are not many casual dining concepts or restaurants in general that have the ability to drive sales throughout the day. With that in mind, we have invested in productivity and technology initiatives so that we can execute on what we internally call the gold standard level of execution. This includes refined marketing and guest loyalty programs, internally developed technology that gives us the ability to rapidly iterate compared to our peers, including our own internally developed app and QR code linked digital menu and our server handheld tablets. We have large and flexible kitchens that allow us to have a broad and innovative menu to stay current with food trends. And we have craft beer authority that is unparalleled in the industry. In fact, just last month, we won another gold medal at the Great American Beer Festival. We also have many sales building initiatives and opportunities, including continuing to grow off-premise sales through takeout and third-party delivery, building out our catering infrastructure, which is in its very early stages, and growing our Beer Club subscription service, which no one can replicate at the scale that we can at BJ's because of our internal brewing capabilities. The bottom line is, we are clearly a differentiated concept with strong competitive advantages and tremendous future opportunities to grow our weekly sales average. Next, our team members. We continue to bolster a first class operations team to lead the execution in our restaurants while readying for the next stage of BJ's growth. We are fortunate to have cultivated a deep bench of talent and can promote from within to maintain our leading high performance culture and standards while undertaking the expansion we see ahead to drive future growth. In order to get ready for new restaurant growth, we recently added the role of Senior Vice President of Operations to our executive team and this individual is solely responsible for leading day-to-day restaurant operations, thus allowing our Executive Vice President of Operations to help guide and integrate our longer-term strategy over the hiring, training, development, and retention of our new managers and team members. We also made some other changes during the quarter, including a new Vice President of Operations to oversee much of the East Coast and six new Directors of Operations and several new General Managers to lead the day-to-day operations of our regions and restaurants. We have high expectations for all of these newly elevated leaders to make major positive contributions to our business in the coming quarters as we build back our staffing levels. Additionally, we’ve added talent at our restaurant support center to drive the next phase of our weekly sales growth as we emerge from the pandemic, including a new Senior Vice President of Culinary, a new leader of our e-commerce and digital experienced team to help build our technology to better serve our guests, a new leader of our beer subscription services to advance our Beer Club initiative, as well as a new leader to drive marketing and a newly created position to drive quick prototyping ideation and innovation at BJ's. Next, our guests. This quarter, we completed a seminal project to develop a deeper understanding of why our most valuable guests choose BJ's above all other concepts. The team has spent countless hours speaking with and listening to our best guests. And I love what we heard; BJ's differentiated position is defined by an environment that energizes the senses with an inviting bar at the core and a menu with familiar offerings made with the Brewhouse twist. Guests raved about our gold standard level of service and the value and breadth we offer across our menu with food quality that rivals restaurants with much higher prices. Our most valuable guests view BJ's as an escape from their ordinary day, and they come to BJ's for all types of social dining occasions. Armed with a deeper appreciation of our best guests and our attributes that attract them, we can more effectively target and drive even more brand affinity and traffic to our restaurants. To that end, we are beginning to develop our own internal guest personalization platform to better engage with our guests in a one-on-one manner. We are in the early innings, but we are already using the learnings and the significant guest data we have been capturing to help guide decisions across our business to best serve our guests. Last, but very importantly, our significant near and long term restaurant growth opportunity. I'm a firm believer that a key indicator of the future success of the brand is the performance of its new restaurant openings. Our recent openings in Lansing, Michigan and Merrillville, Indiana continue to perform strongly and above our system average sales. Communities are excited to welcome BJ's, and it shows with these restaurants opening and remaining fully staffed. Looking ahead, we have a terrific pipeline of sites identified for new BJ's Restaurants in twenty twenty two and beyond. We have been unwavering in our real estate standards for top sites and premier trade areas, and we believe our openings in the next few years will be some of our best yet. And remember, we have a clear path to at least four hundred and twenty five domestic locations, which is about double our current footprint. These opportunities, plus other initiatives such as catering and our Beer Club, will be instrumental in BJ's long term strategic plan. We are rigorously analyzing other potential sales opportunities, given our differentiation in the casual dining industry. Additionally, we are using our learnings from our best guests in prioritizing our investments for twenty twenty two and beyond. After we present our plan to our Board of Directors in December, I look forward to sharing more about these initiatives with our investors and analysts. I'd like to finish by taking a moment to acknowledge every one of our team members. I’m incredibly proud of our team's grit and devotion to delivering gold standard experiences to our guests despite the significant challenges across the restaurant industry. When considering responses to current pressures, we remain steadfast in our approach of prudently making decisions that are ripe for BJ's over the long term and to best position us to continue to lead in sales, unit growth and shareholder returns in the years to come. Now let me turn it over to Tom to provide a more detailed update from the quarter and the current trends.

Tom Houdek, CFO

Thanks, Greg, and good afternoon, everyone. I will provide details of the quarter and some forward-looking views. Please remember this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. For the third quarter, we reported total sales of two hundred and eighty-two point two million dollars. Our sales increased forty-one point nine percent compared to the third quarter of twenty twenty. However, when looking at comparable restaurant sales versus the third quarter of twenty nineteen, we saw a decrease of zero point five percent. The seasonally lower sales, compounded by renewed pandemic concerns and rising costs, resulted in restaurant level operating margins of eleven point two percent, which is an improvement of one hundred and seventy basis points from Q3 twenty twenty, but still behind Q3 twenty nineteen by two hundred and thirty basis points. Adjusted EBITDA was sixteen point four million dollars, representing five point eight percent of sales in our third quarter. This surpassed our EBITDA from Q3 twenty twenty but fell short of the twenty-four point five million dollars reported in Q3 twenty nineteen. We also recorded a net loss of two point two million dollars, reflecting a diluted net loss per share of zero point zero nine dollars on a GAAP basis. As Greg just highlighted, we began the quarter with July weekly sales per restaurant averaging over one hundred and seven thousand dollars, with comparable sales one point four percent above July twenty nineteen levels. Encouragingly, our on-premise sales were within ten percentage points of our twenty nineteen levels, while off-premise sales remained roughly double those levels. However, as we moved into our slower months of August and September, we, along with the entire industry, faced additional challenges from the Delta variant, which affected guest demand and our ability to staff restaurants due to renewed COVID precautions. Our weekly sales averages fell to one hundred and four thousand dollars in August and ninety-seven thousand in September, and comparable restaurant sales declined by one percent in August and one point seven percent in September compared to twenty nineteen, primarily due to diminished dine-in sales that outweighed slight gains in off-premise sales. Lunch and late-night periods were particularly impacted, contributing over three percentage points to our comparable sales decline in the quarter. We anticipate a rebound in lunch sales once more employees return to offices in the New Year, although this recovery may take longer than previously expected due to the Delta variant. Staffing shortages also affected our late-night operations, leading to restaurants closing one point three hours earlier on average compared to pre-pandemic hours in the third quarter. Overall, we experienced a loss of approximately twenty-five thousand operating hours across the system in the third quarter compared to the same time in twenty nineteen, translating to about ten percent of our hours, mainly in the late-night period. As Greg mentioned, in Q3 twenty nineteen, our media spending was approximately two-thirds higher for promoting the BJ's brand across various channels, including television, compared to our Q3 twenty twenty-one spending. We also relied more on discounting to drive traffic, such as a three dollar Pizookie special advertised throughout September twenty nineteen. Assuming that our media investment just breaks even, the additional media expenditure from twenty nineteen translates to roughly one hundred basis points of comparable sales pressure in the current quarter. Regarding expenses, our cost of sales in the quarter was twenty-seven point two percent of sales, which was less favorable compared to both the previous year and Q3 of twenty nineteen. This was primarily driven by food cost inflation of about ten percent, notably affecting our popular meats like ribs, prime rib, and salmon. We use only fresh meats to uphold our quality standards, which have been significantly impacted by inflation, and because they are fresh, many of these products cannot be contracted for extended periods. Labor and benefits expenses stood at thirty-seven point two percent of sales, which was favorable compared to the prior year and Q3 of twenty nineteen. This includes a three point one million dollar employee retention tax credit under the CARES Act, and if excluded, our labor and benefits would be less favorable compared to both twenty nineteen and twenty twenty. Our labor and benefits expenses typically decrease in the third quarter due to lower seasonal sales, then increase once sales recover in the fourth quarter. Our training and overtime hours remained high in this quarter due to increased hiring, impacting labor costs by seventy basis points compared to Q3 of twenty nineteen. As we continue to hire more team members, we expect any additional labor costs to be offset by the increased sales generated. Occupancy and operating expenses at twenty-four point four percent of sales in the quarter were favorable compared to the prior year but unfavorable compared to Q3 twenty nineteen. These expenses remained elevated partly due to our ongoing off-premise sales, which come with added costs like third-party delivery commissions and to-go packaging. We also reinstated some external services and invested in refurbishing certain restaurants as we prepare for the busy Q4 sales period. Looking ahead to the fourth quarter, our sales have continued to improve in October. In the most recent week, we achieved an average weekly sales per restaurant of about one hundred and five thousand dollars, reflecting an eight percent increase compared to our September averages, and showing comparable sales growth of positive zero point two percent compared to the same week in twenty nineteen. On the staffing front, as Greg noted, we finished the quarter with about half of our restaurants at staffing levels close to those of twenty nineteen, and we are making progress in hiring to fully capitalize on what we anticipate will be a busy holiday season. We also plan to test additional marketing strategies aimed at around a quarter of our restaurants with promising guest traffic opportunities based on current staffing levels. Our messaging will focus on brand building and promoting our everyday value, including our Daily Brewhouse specials. Regarding restaurant hours, we recorded a loss of more than twenty-five thousand hours in Q3 twenty twenty-one compared to Q3 twenty nineteen. However, recent staffing improvements have allowed us to extend hours at several restaurants, decreasing the average closing time to one hour earlier, a notable improvement from the previous one point three hours earlier closure. We aim to restore hours to pre-COVID levels as staffing levels permit, with a return to these hours representing a significant sales opportunity for our late-night operations. Lastly, concerning pricing, we implemented a two point five percent price increase in July in response to rising inflation, which was at the upper end of our historical ranges but still below overall inflation levels. With food cost inflation picking up again in mid-Q3, we are set to initiate an additional one point four percent price increase in the coming weeks. This pricing remains below the recent inflationary trends, but our primary strategy at BJ's for protecting and improving margins is to enhance our staffing levels. We understand that well-staffed restaurants lead to positive comparable restaurant sales and more efficient management of fixed costs. Therefore, we intend to safeguard our guest traffic by ensuring price affordability and value at BJ's, while we continue to build our staffing levels. After our November menu update and pricing round, we’re planning to introduce our next menu rollout in February, at which point we will assess the extent of any additional pricing adjustments needed based on commodity and labor trends as the economy stabilizes. We expect commodity challenges to keep our cost of sales steady in the low twenty-seven percent range for the fourth quarter, aligned with Q3 and considering our planned pricing actions in November. From a labor perspective, we project labor costs to remain in the mid-thirty-seven percent range for the fourth quarter, factoring in modest sales growth, current wage trends, and our investment in hiring and training new team members. We anticipate improved labor efficiency after this short-term investment in staffing. Ultimately, our fourth quarter sales performance will significantly influence our ability to manage labor costs effectively. For operating and occupancy costs, including marketing, we expect to maintain an average of around twenty-five thousand per restaurant per week for the rest of the year, consistent with Q3 levels. General and administrative expenses for the third quarter were seventeen point three million dollars. I expect these expenses to range between eighteen million and eighteen point five million dollars in Q4, reflecting recent talent investments and general inflationary increases while we return to more normalized business activities, including travel. We are now targeting general and administrative expenses of approximately sixty-eight million dollars for twenty twenty-one, which encompasses six million dollars in incentive compensation, compared to under five hundred thousand booked in twenty twenty due to COVID's impact on the business. Depending on our performance, this six million dollars in incentive compensation may vary. Our general and administrative budget includes roughly seven million dollars related to equity compensation, consistent with twenty twenty. Additionally, I anticipate our diluted shares outstanding to be around twenty-four million for the fourth quarter, which will reflect options and warrants in the fully diluted share count once we achieve a net income position. Turning to our balance sheet, we repaid an additional ten million dollars of debt in the third quarter, lowering our debt balance to seventy-one point eight million dollars. We ended the quarter with net debt of about twelve million dollars. We continue to utilize our solid liquidity and cash flow to support growth with construction now underway for three new restaurants expected to open in early twenty twenty-two, and we plan to break ground on another location shortly. Our pipeline for new restaurants is strong and consists of high-potential sites, a mix of infill in our successful markets and expansion into adjacent new markets. We are very pleased with the strength of our balance sheet and will remain committed to prioritizing growth investments in new restaurants, improving existing locations, and funding sales-driving initiatives. Looking ahead to twenty twenty-two, while our planning process is still ongoing, we expect to grow comparable restaurant sales above twenty nineteen levels as staffing is restored across our locations and dine-in traffic continues to recover. Wage rates are expected to rise due to the tight labor market, including the final phase of the minimum fifteen dollar wage in California. However, we believe we can leverage the increased sales to effectively manage labor cost increases. We expect food costs to remain elevated but to moderate somewhat, while our ongoing pricing initiatives will help recover margins while we maintain our competitive value proposition. Of the eight or more new restaurants planned for twenty twenty-two, we aim to open four of them in the first half. In summary, we know that the best way to enhance margins is through sales growth. Data from Q3 clearly shows that by fully staffing our operations, we can boost top-line momentum. We have a clear path for sales growth and margin recovery, and our long-term strategy remains strong. While we have faced new challenges during this pandemic, we continue to confront them head-on, manage our business with both short and long-term goals in mind, and stay focused on delivering an exceptional experience for our guests, which will enable us to sustain growth in the years to come. Thank you for your attention today, and we will now take your questions.

Operator, Operator

Thank you. We'll take our first question from Alex Slagle with Jefferies. Please go ahead.

Alex Slagle, Analyst

Thank you. I had a question on the new units you've opened up, if you could talk a little bit more about those and remind us sort of the square footage and features those builds and how those sales metrics you provided compare to previous classes at this early stage?

Greg Levin, CEO

Alex, hey, it's Greg Levin. I'll probably let Greg Lynds touch on some of those as well. But those restaurants are what we call our Proto 2020 restaurants, and they've got kind of more of a circular bar versus our, what I'd call our Proto 7000 and Proto 6000 or prior generation of restaurants. From a square footage standpoint, though, they're pretty much in line with our prior restaurants. So there is not much difference between that. However, that circular bar they end up having a patio that they can roll out to, which helps us from that standpoint and it's just actually adds for a more inviting feeling within the restaurants. When you look at the overall weekly sales average in both those restaurants, they are really, really strong in that regards and they're holding up really well. When I look at like Lansing being the Michigan, which has been a good market for us as well, those sales levels are in line, if not better than other restaurants in the Michigan area. And I think the Merrillville one which is more of a suburb going into the Chicago area, excuse me, is also a leader within that industry or within that area and also holding up better than traditional restaurants. I don't know, Greg Lynds, anything different on those restaurants?

Greg Lynds, Chief Development Officer

No, that the class of twenty twenty one, which is Merrillville and Lansing is pretty much like twenty twenty, twenty nineteen in terms of square footage and number of seats. So as Greg mentioned, the indoor, outdoor patio that we have in the class of twenty twenty one is a little different with a few more seats. But other than that, they're very similar to the other classes.

Greg Levin, CEO

Alex, the one thing I would say, though, being a little bit newer to this position, obviously, been at BJ's for a while, is the core and the difference in that restaurant versus some of our older restaurants is obviously, it's a little bit lighter in that regards. We like the way the round bar looks, and some of the artwork is more contemporary and feeling of the Brewhouse that I think is sometimes missing in some of our older restaurants. And as we go into next year, I work with the team here to put together a plan, I think we'll see some remodels being done in some of our existing restaurants to get them to look a little bit more like some of our Proto 2020 restaurants.

Alex Slagle, Analyst

Got it. And the patios, you had closed those down, right? I think after the second quarter or so the temporary ones?

Greg Levin, CEO

Yeah. The temporary patios have been closed down in the majority of restaurants. We do have a few here in California and a couple of other places where we’ve kind of kept some of that additional patios. But for the most part, they have been closed down. Just off hand, we found when we left them open even during the Delta variant because we kind of brought some of them back, guests really want to get inside the restaurant. Some of it might have been the heat in the summer time. But as soon as those restaurant doors were open, they really flocked inside the restaurant.

Alex Slagle, Analyst

Okay. And then just a question on the restaurant level margins, and you gave a lot of good details I know, I guess it's all sort of changing as we move through this. But I mean on your longer-term restaurant level margin views, I mean, is there anything you've seen in the third quarter in terms of permanent cost increases or structural changes that would really alter your view on eventually being able to get back to the levels of twenty eighteen that you had seen when your volumes can fully recover?

Greg Levin, CEO

Yeah. So we spent a lot of time looking at that, looking at our positive restaurants versus our negative restaurants and so forth. And I generally think looking at this business, and then the restaurant business in general, there is still a lot of fixed and semi-fixed costs that get leveraged when you drive top line sales from that standpoint. When we look at the commodity side, and we weren't expecting a ten percent increase in that regard. And we look at frankly the mix in our business, guests are really gravitating much more towards kind of the comfort food, more in the red meat that had an outsized impact on us and the fact that we used fresh and makes it a little bit more challenging to contract. Taking all that aside and thinking about where we are from a pricing today, which everybody is going to have to take some pricing, I think the ability of adding some pricing over time, and we want to do it right because that value and that price point affordability is key to us is really, really important in regards to driving additional sales. But as we have that, we continue to drive the off-premise sales in our business and the fact that there is so much fixed and semi-fixed costs in this business. We have the ability and the opportunity to get back to more historic margins. So I still see that in our game plan. I don't think anything has changed from a longer-term perspective, I think it's going to be a little bit more challenging here, as we just saw in the third quarter in regards to training and the fact that the delivery companies show up at twelve o'clock in the middle of a lunch shift; that's a real challenge for us in that regards and it pulls people off, we have to pay overtime and everything else. I think as our country works through some of these supply chain bottlenecks, and we get back to a more even business so to speak, or more settled footing on the economy, I have no doubt that we can continue to leverage our business and move it forward to historic margins.

Alex Slagle, Analyst

Got it. Thank you. I'll pass it along.

Operator, Operator

We'll take our next question from Drew North with Baird. Please go ahead.

Drew North, Analyst

Thanks for taking the question. First, I wanted to ask about trends in October. Thanks for sharing the perspective on the various cohorts and the most recent week. But taken together for the month, how are trends tracking for the system relative to twenty nineteen? I think it'd be helpful to better understand where you're tracking earlier in the quarter and get us all on the same page.

Greg Levin, CEO

Looking at the quarter, it started off a bit challenging following our free Pizookie day and the ten off forty marketing from 2019. Consequently, during the first week or so, we saw a decline in the range of three to four percent. However, since then, our sales have flattened out. As mentioned by Tom, we ended last week with a positive comparable sales growth of plus 0.2. While this isn't significant, we are encouraged by this trend. Additionally, we've increased our weekly sales average back to the range of 105 to 106, which helps us manage margins and leverage within the business better. Considering how 2019 unfolded, October tends to be our lowest weekly sales average for the fourth quarter. Therefore, I anticipate our weekly sales averages will trend upward, especially as we bring on more staff and assuming there are no new COVID variants. Overall, we might be down about two percent, but we have transitioned to a more stable position recently.

Drew North, Analyst

That's helpful. And then, I wanted to also ask about the outlook for labor and commodity inflation in twenty twenty two. I know it's early and you provided some directional color. But based on what you're seeing out there, how are you thinking about the level of labor inflation and commodity inflation next year? And then how are you thinking about pricing against that inflation? Do you expect to take an additional pricing beyond the November price increase you mentioned?

Greg Levin, CEO

Sure. Drew, we mentioned earlier that our next menu rollout is scheduled for February, and we will implement some menu pricing adjustments at that time. We are facing another increase in the minimum wage in California. I believe we will be in a strong position moving forward regarding annual increases, which have been consistent for about five years, ranging from ten to fifteen percent. Consequently, labor inflation is likely to remain in the mid- to high-single digits, although it appears to be easing somewhat. What we've noticed is that more candidates are actually attending interviews and starting their jobs compared to when the economy initially reopened. In the beginning, we struggled with candidates not showing up for interviews or not starting their jobs. As Tom mentioned, we currently have a training capacity that is close to our maximum, and if we're down thirty employees in a restaurant, we can only train about six to seven at a time, so it takes a while to get through those training needs. The positive development is that we are working through this backlog now, and we are seeing increased job attendance and better retention rates as we head into September and October. August marked a peak for us, and we have seen a decrease since then. As for the supply chain, we are also beginning to see some improvements, and I anticipate that as we move into next year, conditions will stabilize. Over time, I believe we could see our cost of sales from pricing and other factors fall below twenty-seven percent, returning to more typical levels. Tom, do you have anything else to add?

Tom Houdek, CFO

Yeah. And I think to Greg's point, when we think of the cost of sales and inflation next year, we're looking at it both on an overall inflation basis, as well as just a rolling basis. And as we think of the recent cost, especially these fresh meats, we've seen some of the prices start to tick down modestly. So we still expect some more cost of sales inflation on an absolute basis next year, but it seems like at least in some of these meat categories that at least we will be moving in the right direction there. And to Greg's point with pricing, it's all helpful to margins.

Greg Levin, CEO

And Drew, to your first part of the question was about pricing next year which as I mentioned, we will take in February, we don't know the amount of pricing. We're not going to take pricing right now in what we consider to be kind of this pandemic-induced bubble in that regards. Once you've taken pricing and you've lost that price point affordability with your guests, you don't get it back. And we've got so much opportunity to grow this business for the long term that we understand what's going on right now; we'd rather see supply chain start to normalize, get a better understanding where labor is going and some of these other things around supply chain and then take the appropriate pricing at that time and frankly have that pricing powder still inside BJ's to deploy as we need it.

Drew North, Analyst

It all makes sense. Thank you.

Operator, Operator

We'll take our next question from Nick Setyan with Wedbush Securities. Please go ahead.

Nick Setyan, Analyst

Thank you. So first, I guess appreciating all the detail you guys gave around the staffing headwind, but just all-in-all, is there a way to quantify what staffing headwind was to comps in Q3? I mean it sounds like it's in the five percent to six percent range, is that correct?

Greg Levin, CEO

Yeah. That's correct. If we look at limited hours, we look at the restaurants that had below ninety percent staffing level for the most part and the fact that we had to put a lot of restaurants on a limited menu. When we look at all those things, Nick, they kind of come into the numbers that you just talked about there. Our limited menu restaurants end up with an average check of about zero point thirty five dollars or less or zero point thirty five dollars or more than restaurants that had full menu from that perspective. They're also closing their doors more than one to two hours greater, so we lose that late-night business. And then, obviously we're not seating all the tables. So when we look at those deltas on the things we see that. The other thing that we just recently did is we finally got physical menus back in front of our guests. One of the things we heard from our guests is they love having a physical menu. And I think we are all really excited to get to HTML menus because everybody is thinking we're going to eliminate printing costs and so forth from that standpoint. But we've seen our guests like a physical menu. We've seen other restaurants with the physical menu, but there's a sense of normalcy that we hear from our guests. We know the physical menu, which we were able to rollout here in November is also worth about zero point seventy dollars more per average check. So there's a lot of good things we have going in the right direction, moving the business forward. It's just Q3, the way it kind of started and then what came through from really the Delta and our exclusions in our restaurants really put a challenge in front of us. And frankly, we would rather look at the business from a long-term perspective and make sure we're taking care of our team members, taking care of the guests that come to BJ's, and no doubt, we'll build it over the long term.

Nick Setyan, Analyst

And then on the labor side, I think you said you went from forty percent to fifty percent fully staffed at the end of Q3. I guess given just the recent trends in terms of hiring, where do you expect to be at the end of Q4? And then I guess, what percentage of the understaffed stores can you say maybe each store that's understaffed on average we still need about ten percent more employees, five percent more employees, just to give us some context?

Greg Levin, CEO

I don’t know if I can give you that context. I think what I would tell you is, when we get to close to twenty nineteen, which you could probably think somewhere in the neighborhood of upper eighties to ninety percent or close to twenty nineteen levels, we can generate full restaurant sales in that regards. So I can't tell you thinking about it, how much each restaurant is missing and is it ten or twenty employees from that perspective. That's kind of not part of it there. And Nick, look, if you had and we said this before, we’d love to be staffed yesterday in that regard and our goal was to be staffed up at the end of the third quarter, and I think us as well as we heard from other companies got a little bit challenged as the hiring didn't pick up as much as people might have thought early on in August and September. I think a lot of that was due to the Delta variant. I think that's also due to the fact that people have pretty solid balance sheets and might not need to come back to work right away. But as I mentioned, just a few moments earlier, we're seeing key members show up or new employees, I should say. We're seeing that number as we just mentioned get better throughout the quarter, and it looks like it's getting better here into Q4. Our goal and I think Tom mentioned this on the call was to get every restaurant back to a full menu by early November and to get restaurants back a full menu by early November means our goal is to have all of our restaurants staffed up by early November.

Nick Setyan, Analyst

And would that also imply full hours, so like not the one-hour less at night?

Greg Levin, CEO

Our goal would be to get there. I'm not sure on that one. I think that's going to be the last move for us is extending some of those hours. I think certain restaurants were already extending the hours because we know we have the capability, but as those team members get trained, and we can put the full menu in place, that's going to be the first step. The next one then would be to additionally close the gap on the hour.

Nick Setyan, Analyst

Okay. And then just one last question, I believe we discussed two point five percent pricing along with one point four percent pricing, and for the first quarter, we still have the pricing in effect through February. So that would put us in the first quarter somewhere in the four percent to four point five percent range?

Greg Levin, CEO

That'll be correct, kind of going in at two point five percent and one point four percent that put us, call right at four percent and then some time in, kind of, I would say mid to early February or early to mid-February will be when our next menu rolls out.

Nick Setyan, Analyst

Got it. Thank you very much.

Greg Levin, CEO

You're welcome.

Operator, Operator

We'll take our next question from Todd Brooks with CL King & Associates. Please go ahead.

Todd Brooks, Analyst

Hey. Good afternoon, folks. A quick question for you on the top line side across, and we're very focused on the expenses in the quarter and the headwinds. But as we're emerging from the pandemic and I know Delta caused a wiggle in some traffic, but it seemed like it was more of an operational curtailment. Greg, is there any change in your thinking about AUVs really building back to a substantially higher level, as we normalize coming out of the pandemic as far as success that you're still seeing with off-premise revenue retention, return of dine-in demand when the situation is a little bit more normal, and some of the other incremental drivers of revenues, just your thoughts on when we get to a new normal where AUVs could be tracking towards?

Greg Levin, CEO

There is nothing that has changed my perspective on BJ's potential for weekly sales averages. I believe that the initiatives we’ve discussed regarding off-premise sales are having a positive impact. We have added someone to lead Beer Club, which has increased the frequency of visits from our current guests. Additionally, we have catering services that we have not fully rolled out yet, along with other off-premise initiatives. As guests continue to return to our restaurants, we are seeing growth in weekly sales averages in many of our fully staffed locations. I still see potential for off-premise sales to increase from the current range of twenty to twenty-five thousand, possibly by another five thousand or more. Furthermore, we can still enhance our dining room experience, which is currently performing around eighty-five percent capacity. If we can get the dining room back to full strength while maintaining off-premise sales, I expect our weekly sales average to surpass historical levels. We haven't noticed a significant trade-off between off-premise and dining room sales since all dining rooms have reopened, and off-premise has remained strong. While we haven't focused heavily on promotions for off-premise, its performance has been stable. The key lies in staffing our restaurants and boosting dining room sales, which I believe will help us exceed the weekly sales averages seen in 2019.

Todd Brooks, Analyst

That's great. And then you guys talked about the relatively fully staffed cohort and the performance in Q3. Can we talk about just the performance in Q4? Is it still kind of that group of stores running up in that mid-single-digit type of range? Any change there? Is that actually inflecting higher as we come out of that seasonal slow period, August, September?

Greg Levin, CEO

Right now it's still primarily those same cohort of restaurants that are driving that. This last week, those restaurants started to go up in regards to weekly sales average as we got through the free Pizookie day and some of the other thing, and we've seen our overall weekly sales average move into one hundred and five thousand plus. So we have seen those moving forward. We actually set a record just last week at one of our restaurants. So we're seeing those moving forward. Where we're seeing the challenges, we've talked about this before, so this is not anything new, but it's still the Bay Area is a challenge, and we are expecting office buildings to come back, or people come back in their offices in originally around September and October, and that's going to be pushed to twenty twenty two. So I think we've got that opportunity there to grow that part of it. And then kind of some of our restaurants on the Eastern Seaboard just are not as staffed as we'd like them to be. And they're slowly moving in the right direction, but as you kind of pulled back from some of those restaurants, the ones that are fully staffed are doing what we expect them to do in driving positive comp sales.

Todd Brooks, Analyst

Okay. And the final one for me and then I'll pass it along. If you talked about seasonally average weekly sales would build kind of from here on out through the end of the year just as we get into the heart of the holiday season. Is there anything to be aware of from a fiscal nineteen type of compare from other promotional activities that might not allow it to maybe a, grow in a linear fashion and b, make the comparison tougher than we might realize over kind of the November, December window?

Greg Levin, CEO

Not to the same degree, but I will say, we spent closer to and I've got to pull up nineteen’s here, but I think we spent in marketing closer to eight million; that's if I put my nineteen numbers here, nineteen, we spent almost eight million dollars in Q4 in marketing and our marketing here is going to be somewhere in the kind of five, five point five range. So it is less marketing dollars being spent right now that ten of forty was probably a big one in the free Pizookie Day that we did at the beginning of October and the three dollar Pizookie in September. We're probably the highest hurdles we had to go over. But we're not at a point, frankly; we're not at a point yet because our restaurants are fully staffed to lean all the way into marketing. As I said on my part of the call, I would love to do other sales initiatives, some of the things we learned from our best guests and things like that that are coming forward next year. But really, we know that right now if we drive staffing into our restaurants, we can drive top line sales, and then we can leverage the fixed and semi-fixed costs within our business. So if you get the staffing goals hit for November, you would expect to see average weekly sales kind of grow from this latest week in October where you’re in that one hundred and five range just seasonally?

Todd Brooks, Analyst

That's correct.

Operator, Operator

We'll take our next question from Nicole Miller with Piper Sandler. Please go ahead.

Nicole Miller, Analyst

Thank you. Good afternoon. I appreciate that you're nearly fully staffed at your ideal level. Considering what you've learned from your employees, how do you assess whether these conditions are temporary? If they're not, what steps would you take? I'm thinking about factors beyond just higher wage rates, such as potentially overstaffing certain shifts to address pressures from call-ins or other issues. How do you approach that if it's not a temporary situation? Thanks.

Greg Levin, CEO

Nicole, that's a great question. Everyone in the industry is working on how to address employee challenges, and I don't believe anyone has found the perfect solution yet. We are aware of the various initiatives being implemented, and although we may not promote ours as publicly as other companies, we engage in practices like team member appreciation, raffles, shift raffles, and referral bonuses. Over time, you might see a trend towards more predictive scheduling, which is something we strive to implement to ensure team members have guaranteed shifts regardless of fluctuating sales, as many team members prefer predictability to manage their schedules better. The work culture within our restaurants is crucial too. We spend a lot of time training our general managers to foster a supportive environment for team members. People don’t usually leave jobs for negligible pay raises; it's more about finding balance within the restaurant and creating a positive atmosphere. Improved predictive scheduling and how our managers support team members contribute significantly to enhancing our team's experience, and these are ongoing areas of focus alongside other offerings we are exploring. You're welcome.

Operator, Operator

We'll take our final question from Sharon Zackfia with William Blair. Please go ahead.

Alex Vasti, Analyst

Yeah. Hey, guys. This is Alex on for Sharon. Just a couple of quick ones. So maybe could you just quantify where the overall staffing level is right now versus pre-COVID? And what your line of sight may be to be returning to full staffing? And what could underscore your confidence in restoring those hours and menus by early November?

Greg Levin, CEO

You partially answered your own question by mentioning that the menu will be rolled out in November, which is when we aim to be prepared. That's our timeline. I believe changes in COVID may influence that situation. I'm trying to check on our current staffing levels—do you have that information, Tom?

Tom Houdek, CFO

It's sitting on average at about ninety percent across our system. Some have more staffing than we did in twenty nineteen, but obviously some a bit less. So just looking at the average, it's right around ninety percent.

Alex Vasti, Analyst

Okay, great. Thanks. And then just one more, so in those restaurants that are staffed below twenty nineteen levels, is there any kind of underlying common thread between those? And what tactics do you guys plan to use to bolster those staffing levels?

Greg Levin, CEO

I think this is an interesting question. When we examine this situation, we notice that certain regions, particularly California and Texas, where we have strong brand recognition and have been established for some time, make it easier to bring team members back and to share staff between locations. For example, if we have restaurants in California that are eight to ten miles apart, we can borrow team members, which facilitates operations. In contrast, some of our newer markets present challenges, especially if there aren’t nearby sister restaurants to draw from, making it difficult to share team members if the nearest restaurant is two or three hours away. This is a recurring theme when we analyze staffing levels. While I wouldn’t claim it’s a perfect correlation, it's a noticeable pattern in some of our locations. As I mentioned earlier, we are actively working on strategies to bring people back. Similar to other companies, we are conducting job fairs, encouraging referrals, and engaging with potential team members to highlight growth opportunities within our restaurants. We've also updated our training materials to simplify the onboarding process and to focus on smaller areas to start. Additionally, we are enhancing our workplace culture through team-building activities, appreciation weeks, and raffles to attract new team members.

Operator, Operator

And ladies and gentlemen, this does conclude today's question-and-answer session and today's conference. We appreciate your participation. You may now disconnect.

Greg Levin, CEO

Thank you.