Earnings Call Transcript - BJRI Q3 2024

Operator, Operator

Hello, and welcome to the BJ's Restaurant Third Quarter 2024 Earnings Release and Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference is being recorded. I would now like to hand the call to Rana Schirmer, Director of SEC Reporting. Rana, please go ahead.

Rana Schirmer, Director of SEC Reporting

Thank you, operator. Good afternoon, everyone, and welcome to our fiscal 2024 third quarter investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2024 third quarter. You can view the full-text of our earnings release on our website. I will begin by reminding you that our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. These statements are based on management's current business and market expectations and our actual results could differ materially from those projections in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission. We will start today's call with prepared remarks from Brad Richmond, our Interim Chief Executive Officer, followed by Lyle Tick, our President and Chief Concept Officer; and Tom, our Chief Financial Officer. After our prepared remarks, we will take your questions. And with that, I will turn the call over to Brad Richmond. Brad?

Brad Richmond, Interim CEO

Thank you, Rana. And hello to those listening in. We appreciate you dialing in to hear us talk about our third quarter results. I see several familiar names and some new ones I look forward to meeting soon. I'm excited to be here at BJ's and what lies ahead for our brand and for our shareholders. Lyle and I see a number of strengths to leverage and modest challenges that are readily addressable. Our highest priority is a thorough discovery of the brand, its challenges and opportunities and a serious evaluation of our activities, spending and investments. This is well underway and we are moving with urgency to shape our plans for 2025. We start from a position of relative strength as the brand serves over a million guests a week, has 220,000 dedicated team members who generate annual sales of more than $1.3 billion and free cash flow from operations in excess of $100 million. While there is a good bit of work to be done, our experience and current observation suggest we have permission to be optimistic about what the brand can deliver to our guests, team members and investors. We will speak in greater detail on our learnings and plans when we report fourth quarter earnings and full-year 2024 results, but we'll share some of our initial thinking today. Lyle will comment more on our near-term learnings and thoughts in a moment. And Tom will take us through the third quarter performance details and our outlook for the fourth quarter. And then we look forward to taking your questions and sharing our thoughts. We ask that you limit yourself to one question and one follow-up question, then return to the queue. The three of us will remain here on the line to take all your questions. Let me begin with some brief third quarter highlights and early thoughts regarding our emerging financial discipline. The third quarter was significant in that we generated positive traffic and meaningfully outpaced the competitive set by employing a limited time, everyday price-point approachable promotion featuring a limited number of offerings that are appealing to guests, support our gross margin criteria and feature our iconic Pizookies offered during the weekdays. We are in a highly competitive environment with many major players competing on value with substantially more marketing spend than what we have, but we are demonstrating we can win in this space. However, we did not flow through as much of the third quarter incremental sales gains to earnings as we would expect. We have identified and addressed those challenges and as the offer continues through the fourth quarter, we expect to generate higher flow-through and stronger margin levels. Tom will walk us through that detail later. We are instilling a more structured and disciplined approach around our financial policies. All capital deployment must be a value-creating investment. Our remodel program has demonstrated good results in this regard. We need to increase our individual site success rate to raise overall value creation delivered, but we believe we have identified the opportunities and have the elements to make the necessary adjustments. Our current remodel program pace remains on track with the potential to increase the pace in the new fiscal year. New restaurant investments have not consistently achieved a hurdle rate return at all locations. We are evaluating our market penetration strategy and site selection criteria to improve results, while maintaining a reduced opening pace as we fine-tune these elements. But ultimately, new units are integral to our growth and value-creating proposition. Assessing the optimal capital structure for our business has durable cash-flow generating capabilities. We look forward to sharing our learnings of our fiscal year results on this matter. In the interim, our cash flows exceed our probability - a high probability value-creating investment opportunities. During this period, these excess funds will be returned to shareholders in the form of a well-structured and disciplined share repurchase program, similar to what was adopted post the leadership changes. So more to come on these topics, but we need to complete a thorough discovery and develop our going forward plans to inform our financial projections for 2025 before we get into greater detail. However, these comments highlight our rigor around financial decisions and the directions we take going forward. With that, let me turn it over to Lyle for some of his initial observations and thoughts.

Lyle Tick, President and Chief Concept Officer

Thank you, Brad, and greetings to everyone who has joined us today to talk about BJ's. Six weeks into my journey with BJ's, I find myself more energized and optimistic than the day I started. I've had the privilege in the first several weeks to visit BJ's restaurants across the country, spend time with our operators and support center teams, including attending our GM conference, which was a great learning accelerator for me. I've worked shifts in multiple restaurants and talked to many of our guests. As Brad referenced in his comments, BJ's is starting from a position of relative strength with over $1.3 billion in annual sales, the third-highest AUV among scaled competitors and some powerful strengths and equities to build from. Through our initial discovery phase, some of the things that stand out to me are, first and foremost, our people are a real strength and advantage. There's no business quite like restaurants where your brand promise is brought to life every day through your frontline team members. As I'm out and spend time with our team members, I ask three questions: what's the best part about working at BJ's? What do we do better than anyone else? And what's the one thing that you would change to make things easier or better if you could snap your fingers and make that change? And when I ask about the best part about working at BJ's, universally, it's about the team, the culture and both the desire and freedom to please the guest. There is a buy-in and commitment by our team members that I believe is a real strength, a competitive advantage for us to build upon, and we can help them be more effective going forward. This is reflected in both our qualitative and quantitative guest feedback as a main driver of repeat visits. Number two is our unique ability to win across more occasions than our competition. BJ's is unique in its ability to fill a broad cross-section of needs and occasions across multiple cohorts and have them seamlessly coexist under one roof. I have found it very powerful sitting in a packed BJ's and looking around and seeing everything from a group of high-school baseball players, a friend group catching dinner, happy hour after work, a family, a girls' night out, friends catching the game, large group celebrations, and the bar occasion; our facilities, menu, and brew house atmosphere give us the right to win across more occasions than our competition. And this is reflected in our current AUVs, but also an opportunity for us going forward. Our broad appeal and breadth is both a real strength and a challenge, and I'm going to talk more about this shortly. We have unique and ownable platforms like the Pizookie and our craft beverages that recruit guests and create relevancy across age cohorts, which is relatively unique. The recent performance of our Pizookie Meal Deal, share gains, and outperformance in media markets suggest strong consumer affinity for BJ's and underline the headroom that still remains for the brand with respect to awareness and saliency. Taking a step back on discounting and promotions overall. While we're very encouraged by the results and potential headroom for the Pizookies Meal Deal, my initial observation when looking at our overall discounting and promotional footprint is that we have an opportunity to rationalize our programs, and this is a priority area of evaluation in the short-term. The way I think about these programs is that in order to work, they need to significantly expand our total available market and/or drive incremental occasions. They should be targeted at days and day-parts where we have capacity and ultimately drive materially more dollars to the bottom line. So the goal will be to apply clear strategic guardrails to all programming, likely streamlining some programs and then leaning into the ones that hurdle. A good example of this for me in Q3 is the Pizookie Pass. It was more popular than we expected, which is a good sign with respect to the cachet of the Pizookie. And while it drove incremental traffic, it also caused check compression and downstream P&L pressure beyond expectations. I would characterize this program as effective, but not efficient. Going forward, this program will need structural re-evaluation if it will continue, and all of our programs will go through a similar filter. As I mentioned, our broad appeal and breadth is both a strength and a challenge and highlight some areas of opportunity. While we're still learning and discovering, as we go forward, four key areas of focus will be: driving more clarity around our brand. BJ's has distinctive characteristics borne out of our brew house DNA. We are uniquely the only national brew house and have an opportunity to reinforce our uniqueness and what truly makes us special and not allow ourselves to be repositioned as a generalist casual dining brand. Number two is being clear on where we will drive authority and competitive advantage. We tend to be known for our breadth and 'no veto vote,' which is important. Our brand positioning work will guide us to drive authority and competitive advantage through platforms that reinforce our brand equity and drive desirability without sacrificing menu turf. We want to ensure that we are the desired choice for our guests versus just the easy one. Importantly, the brand work we do will also help us filter activity and complexity that does not reinforce brand equity. The third area is delivering great hospitality and execution. As I mentioned, we have an amazing base of team members who are bought in who want to wow our guests. We have an opportunity to help them do that more consistently through both simplification and better leveraging our data. With respect to simplification, I've heard consistently from our teams that we have an opportunity to make it easier for them by removing unnecessary complexity and we're working hand-in-hand with them to simplify where appropriate. With respect to leveraging data, this is about having the right people in the right place at the right time from a labor perspective. While this will help with speed, which impacts consumer satisfaction and table turns, in my observation, the bigger unlock for us will be greater utilization and the elimination of unnecessary waits and walk-offs. The last area is continuing to take care of our assets and keep the brand fresh. Another area of relative strength for BJ's based on our guest research is our atmosphere. And as Brad mentioned, our remodel program has demonstrated positive results, and we will continue to refine and evolve this program to keep our brand fresh, while reinforcing and highlighting core equities. Today, more than ever, guests have a high bar for what's worth it. I'm a strong believer that being worth it means delivering a holistic experience that brings together craveable food, consistently executed in a great environment, and delivered by people who care about the guest and their transaction. It is not just about the price point. BJ's is well-suited to deliver a holistic value proposition, and as I mentioned earlier, I believe we have the right to win across more occasions than our competition. Our time and energy will be focused on programs and initiatives that continue to sharpen our focus, simplify operations, and enable our managers and team members. I look forward to the opportunity to talk to you more specifically in the future about our plans. Thank you. And now I want to turn it over to Tom for a deeper dive into Q3 results.

Tom Houdek, CFO

Thanks, Lyle, 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 generated sales of $325.7 million, which was 2.2% higher than last year. On a comparable restaurant basis, Q3 sales increased by 1.7%. Our sales-driving initiatives worked to grow sales, traffic, and market share in the third quarter. Our comp sales growth was driven by 1.3% traffic growth, which was our best traffic quarter since 2018 when excluding the COVID recovery quarters. In Q3, compared to the casual dining industry, our comp sales beat the industry by 3.1 percentage points and our traffic beat by 5.7 percentage points. Our traffic outperformance was driven in part by value programs such as the Pizookie Pass that launched in late June and the Pizookie Meal Deal that launched in September, as well as an initiative to expand loyalty program membership and usage. These programs, particularly the Pizookie Pass and loyalty expansion, impacted our sales leverage in the third quarter. We also built guest excitement around limited-time offerings. Comp sales built through the quarter with our September comp of 3.8%, demonstrating the momentum building behind our Pizookie Meal Deal weekday promotion that launched in the second week of September. Our restaurant-level cash-flow margin was 11.7% in Q3, which was 20 basis points less than a year ago. We did not fully leverage our strong traffic growth as higher than anticipated restaurant costs, which we are addressing, resulted in lower restaurant-level operating margin percentage. Our restaurant-level operating profit was $38 million in Q3, which was $200,000 higher than a year ago as our higher sales drove slightly more restaurant dollar profits. Adjusted EBITDA was $18.5 million and 5.7% of sales in the third quarter. Q3 EBITDA was $1.1 million lower than last year, driven by higher G&A. The main year-over-year G&A variance was higher deferred compensation expense, which is a non-cash item and fully offset in other income. To note, approximately $1.7 million of net expenses incurred related to our leadership transition are added back to our Q3 adjusted EBITDA. We reported a net loss of $2.9 million and diluted net loss per share of $0.13 on a GAAP basis for the quarter, which were both better than a year ago. Note that the Q3 net loss includes a $400,000 pre-tax or $0.02 per share net leadership transition benefit, which is a combination of the $1.7 million net expenses added back to EBITDA and a $2.1 million stock-compensation credit. For more detail on restaurant expenses, our cost of sales was 26.6% in the quarter, which was 70 basis points unfavorable compared to a year ago. Traffic-driving initiatives, mainly the Pizookie Pass and the loyalty program expansion, weighed on percent margins. Food cost inflation was approximately 3% year-over-year, which was offset by menu pricing. Cost increased for certain key items in Q3, including avocados, ground beef, and bone-in wings, which are items we purchased at market. In October, costs for all three items trended down and are now either back to or below Q2 levels. Labor and benefits expenses were 37.1% of sales in the quarter, consistent with the third quarter of last year. Along with guest traffic, our new promotions added complexity, which reduced our labor efficiency in the quarter, and we did not leverage labor to our full potential. We staffed our restaurants to deliver strong sales and traffic growth in the third quarter. Now with improved top-line trends, we are actively refining our labor model to better leverage the high sales. Occupancy and operating expenses were 24.7% of sales in the quarter, which was 40 basis points favorable compared to the third quarter of last year. We continue to achieve strong efficiency gains over the prior year from our cost-savings initiatives and leverage from higher sales. G&A was $21 million in the third quarter. Included in G&A was a $700,000 expense linked to market-based performance of our deferred compensation plan compared with a $100,000 benefit last year. The $800,000 increase in our deferred comp expense equates to approximately 25 basis points of sales. As a reminder, this is a non-cash item, and is offset in other income and expenses in our P&L. During the quarter, we repurchased and retired approximately 268,000 shares of our common stock at a cost of $8.2 million. We currently have approximately $44 million available under our share repurchase program. Turning to the balance sheet, we ended the third quarter with net debt of $48.1 million, comprised of a debt balance of $66.5 million plus cash and equivalents of $18.4 million. This equates to net debt of $800,000 higher than our balance at the end of Q2. Value is as important as ever to guests in the current environment. Given the consumer backdrop, we adapted our menu strategy by quickly moving to design, test, and launch a comprehensive new value program in the Pizookie Meal Deal, a compelling traffic-driving deal with attractive economics given the food cost profile and weekday timing. We supported the launch with call to action messaging, including media in certain markets to build initial awareness and drive trial. Additionally, more guests than ever are enjoying Pizookies, which is a brand differentiator for BJ's. Since launching the Pizookie Meal Deal in the second week of September, our weekly comp sales results have beaten the competitive benchmark by approximately 500 basis points on average. For the first four weeks of the fourth quarter, our comparable restaurant sales are up more than 4%. Our value message is now focused on our $13 Pizookie Meal Deal available Monday through Friday, which continues to drive sales and profits across the day parts. We are now past the impact of our Pizookie Pass promotion and our loyalty expansion and continue to deliver sales and traffic well ahead of the industry. As we've said before, dollar profit growth is our top success criterion for any promotion. We are encouraged by the incremental profit flow-through of our Pizookie Meal Deal, especially given the incremental weekday traffic it is driving into our restaurants. Given our current promotional mix, along with a more favorable commodity market environment and a 90 basis point menu pricing round in late September, our cost of sales has recently trended in the 26% area or approximately 60 basis points better than Q3. October is the final full month of our Pizookie Pass promotion. Our focus has shifted to the Pizookie Meal Deal, which is driving strong sales and traffic during weekdays and has a food cost profile more similar to our regular menu. In terms of margin improvement initiatives, we continue to work with our restaurant teams to identify and realize labor efficiency opportunities overall and in the context of executing our traffic-driving initiatives. Also, we completed the rollout of a specialized disposables distributor in Q3 and will begin to realize the full savings in the fourth quarter. Taking into account recent sales and cost trends, as well as our promotional mix and continued margin improvement initiatives, we expect restaurant-level margins to be in the mid to high 14% range in the fourth quarter. This percent margin is lower than our expectations from earlier this year, but our recent sales trends are higher than our prior expectations, given the positive guest response to our Pizookie Meal Deal resulting in a similar level of dollar restaurant profit. We expect G&A in the $21 million area for Q4, which has been our recent run rate before onetime and non-operating items. In conclusion, with significant cash flow from operations and a healthy balance sheet, BJ's has the financial flexibility to execute multiple initiatives to enhance shareholder value. Our goal remains to grow absolute dollar profit in any consumer environment. 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, as well as our share repurchase activity. We have a clear path to sales and profit growth ahead, and our long-term strategy and the strong consumer appeal for the BJ's brand position us well to continue building on our successes in enhancing shareholder value. Thank you for your time today. We will now open the call to your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Today's first question comes from Brian Bittner with Oppenheimer. Please go ahead.

Brian Bittner, Analyst

Thanks. Good afternoon. A major component of the BJ's investment story earlier in the year was about margin expansion and the opportunity there. And obviously, on the second quarter earnings call, that was taken off the table. And with these 3Q results, we obviously saw margin underperformance. Your third quarter restaurant margins of 11.7%, that was well below that mid-12% third quarter margin that you guided to three months ago, but sales were directly in-line. And I know you said some costs were higher at the Pizookie Meal Deal, avocados, and wings. But does that explain the entire delta between the margin underperformance and what you guided to? And as we look into the fourth quarter, what exactly does reverse and has reversed that makes you so optimistic about the 4Q margin guidance?

Lyle Tick, President and Chief Concept Officer

Sure, Brian. Thank you for the question. In the third quarter, we experienced a higher level of promotional activity than we anticipated. This, along with some increases in supply chain costs and not managing labor as effectively as we expected, were the main factors affecting our margins. As the quarter progressed, we increased our promotional activities, which further impacted margins more than we had forecasted. Looking ahead to the fourth quarter, we expect to see improvements in food costs, both in terms of market prices and our promotional strategies. Additionally, as we assess labor management for the fourth quarter, these factors will be crucial in our expectations for recovery, which supports the guidance we provided.

Brad Richmond, Interim CEO

Hey, Brian, it's Brad here. I want to add a bit more to that. I understand there's some confusion since we discuss Pizookies frequently, but we are very pleased with the traffic generated by the Pizookie Meal Deal and the margins it produces. It aligns well with our overall menu. However, we did face challenges, particularly with the Pizookie Pass, which Lyle mentioned earlier. It didn't perform as expected and significantly impacted our sales. Over time, we are getting a clearer understanding of which offerings enhance traffic and profitability. Some underperforming items are being phased out or addressed, with some changes set for the fourth quarter, while others may take longer. This is part of the reason for our optimism. I want to stress that the Pizookie Meal Deal is crucial. In this competitive environment, considering the marketing dollars we can allocate and being a share taker informs our strategy and opportunities moving forward. This is a key aspect of our optimism.

Brian Bittner, Analyst

Thanks for that. And Brad, you bring a lot of experience to the table as you come into the role. And you did mention bringing some financial discipline going forward. And just based on your experience for a brand like this with the AUVs that it has, where do you ultimately believe margins could be or should be? And just what are your early assessments on what could be some potential margin enhancers in the near term and the long term?

Brad Richmond, Interim CEO

Well, I think there's a lot of potential for this brand. When you look at the AUVs that it has and the ability to leverage those, there's meaningful upside there. As I look backwards at what we've done here, I think we've actually focused maybe a little too much on taking cost out of the business instead of growing the business. AUVs or same-restaurant sales increases is the highest value-creating opportunity that there is. And so, I think there's a lot of potential there when you look at where our traffic was pre-COVID, where it is today and the fact that we can do the Pizookie Meal Deal here today and see a significant traffic lift occurring Monday through Friday during our lower-volume periods and actually utilizing our spaces more. I mean, our space is what it is. It's a pretty good-sized space. So it has the ability to deliver a lot more volume and we're seeing when done right, the guest appeal is there. We do have to work, though, on the internal workings to the box to get more of the sales increase to earnings. And that's painfully obvious and something that we're readily addressing.

Operator, Operator

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

Alex Slagle, Analyst

All right. Thanks, and welcome, Lyle and Brad. I wanted to mention that it’s early in the process and I understand you're working through various aspects, but as we approach November, I’d like to discuss capital allocation and the balance between new units and remodels moving forward. It appears that you plan to adopt a more cautious approach regarding new units and focus on improving the returns and performance of existing locations, which haven’t been as consistent as expected. Could you share your thoughts on what next year might look like? Will it be similar in terms of the number of new units, with an increase in remodels? Is that a reasonable way to approach this?

Brad Richmond, Interim CEO

Yes. I appreciate the question. What I will start by saying is, no, I want to grow new units. But as I look at the opportunities today, same restaurant increases is our greatest opportunity to generate value for our shareholders. Ultimately, though, we need the new unit growth and each one of those is a pretty significant bet, if you will. And so, we really need to be sure that we're comfortable that we have all the elements right, everything from the market penetration, i.e., where do we want to go next, and working on our site selection criteria to ensure that we're consistently getting a high success rate. So that's how I look at it. The pause, if you will, there's still quality sites out there. There's actually less competition for these sites than there were in the past. And so we do want to be advantageous to going after those. But it's hard today to say we're going to really ramp this pace up. I would suspect that during the new fiscal year, we'll reach that point where we will be more appropriately aggressive and we have the elements worked out ourselves. But as you're aware, there's pretty long lead times for these types of investments. So I don't think our pace for 2025, like I said, we're still refining this, so I'm leaning into this. It's not going to dramatically change. I think realistically, the change that you would see would be what occurs in 2026, 2027. Yes, there might be some capital dollars spent towards the mid-latter part of next year. But we're kind of leaning into this. There's still work to do, but to give you an idea of how we're thinking it might lay out.

Tom Houdek, CFO

Sure. We didn’t mention this earlier, but it's important to note that we had two openings in the third quarter that are performing very well. We opened in Central California and Tracy in August, achieving our highest first week ever for an NRO at about $240,000. In September, we opened another location outside of Houston in an area called Cyprus, which is currently our third-highest sales restaurant in Texas. We are pleased with these openings. However, we are fine-tuning our approach and the economics to maximize returns on these investments. Regarding remodels, we will provide more updates in Q4 when we establish our plans for next year. We also plan to allocate a significant amount of capital for share repurchases due to the free cash flow we’re generating, ensuring we return cash to shareholders while making prudent investments to grow the business.

Brad Richmond, Interim CEO

Hey, Alex, I want to jump back to this as Tom brings up some pretty big points there. We opened a new unit in California where we have high awareness and the uniqueness of the brand here was, I mean, we're really pleased with the volumes that are coming out of there. And we do look at it from a value-creation perspective. So it's not going to have the same restaurant-level percentage margins, but the absolute dollars clearly justifies the investments there. And as he mentioned, the Texas location where we don't have the brand awareness, it opened up pretty strong and it continues to build from where it is. So we just need to understand that better, as I said, shape our penetration strategy. And then you always have to work on that site selection criteria because these are our big dollar bets and you need to get those right.

Operator, Operator

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

Jeffrey Bernstein, Analyst

Great. Thank you very much. Brad, welcome back to the forefront of the industry in these calls. Nice to hear from you. Welcome to BJ's Lyle and hey, Tom. Just had two questions. The first one just on following-up from a cash usage perspective, as you mentioned, the new unit returns haven't been consistent. And clearly, as you've said, the margins aren't at the desired levels. I'm just curious, you mentioned that new units are integral. It would seem like the alternative would be to potentially hold the new unit growth and return the cash to shareholders via repurchase based on where the shares are trading today. I know that was a topic that was hotly debated at the last Investor Day pretty much 12 months ago. Just wondering whether that's an option that's been considered or why is it that you're very keen to build new units from here? And then I had one follow-up.

Brad Richmond, Interim CEO

Sure. You're correct that this business generates significant cash flow, giving us many opportunities to invest. Currently, based on our visibility and the desire to make quality decisions, we're comfortable accelerating remodeling efforts. We also have potential sites for new units that we believe the brand can succeed at, but we will proceed at a careful pace to optimize future opportunities. This raises two points. With our excess cash, we will implement a well-structured share repurchase program with specific criteria, rather than making random market buys. We had great success with this in the last quarter and intend to continue. While the repurchases may not perfectly align with quarterly results, we believe it is appropriate to use some of our excess cash to buy back shares. Furthermore, we are working on our financial projections for 2025, and it makes sense for the business to take on a bit of debt. We are primarily equity financed, which sets a high bar for our cost of capital. We will remain cautious and conservative, so do not assume we will heavily burden the business with debt. Our current debt levels are very low, and from an investment standpoint, both for management and to meet shareholder expectations for enhanced returns, it makes sense to introduce some leverage to buy back shares or invest in quality opportunities.

Jeffrey Bernstein, Analyst

Got it. My follow-up question is about the compensation side, which you indicated is a key aspect. You mentioned that the total compensation is 1.7%, of which 1.3% is traffic. I'm interested in the other components. I assume there is healthy pricing, and I'm curious about those components as well. Specifically regarding pricing, I'm wondering about your outlook for 2025. Do you have confidence in your pricing power? It seems like your brand has strong appeal, and some might argue you are underpriced, which could benefit margins. So I'm trying to understand the pricing in the third quarter, what the outlook looks like, and your perspective on pricing power as you head into next year from a brand standpoint.

Tom Houdek, CFO

Sales increased by 1.7% and traffic rose by 1.3%, resulting in a check growth of about 50 basis points. Pricing was in the low 3% range in the third quarter, and we just added 90 basis points at the end of September, which compares to an increase of 180 basis points last year. We are currently seeing mid 2% pricing. In terms of competition, we aim to generate value in our business. If your inquiry is about pricing power, we want to boost traffic while recognizing this allows us to selectively raise prices in certain areas, as we've set our prices lower than much of our competition this year. The difference between pricing and check reflects our promotional activities, but off-premise sales continue to negatively impact check amounts. This results in lower checks from off-premise transactions compared to on-premise. Additionally, our late-night business is performing well in terms of traffic; however, late-night checks tend to be at lower dollar amounts, which also affects the overall check average.

Jeffrey Bernstein, Analyst

Okay. Understood. And then just to clarify the CEO departure and Brad holding the interim role. I'm just wondering what the thought process is, whether there's interviewing going on internally and externally or whether there's other changes likely or how you view the management team today and what we should think of in terms of potentially a permanent CEO position? Thank you.

Brad Richmond, Interim CEO

Yes, that's a good question, very pertinent. I would just step back a little bit further and say the Board has kind of been reconstituted this year. They've been willing to take the board and necessary steps to move this business forward and feel comfortable with the path that we're on. I'm here really because of kind of public company experience and bringing that to this business and help with a transition here. We really are grateful to have Lyle join the organization; he brings a tremendous amount of depth and talent into the whole brand side of the business, but also the operating side of the business and we look forward to his continued future success here.

Operator, Operator

The next question comes from Brian Mullan with Piper Sandler. Please go ahead.

Brian Mullan, Analyst

Hey, thank you. Question on menu simplification. You referenced this as an opportunity a little bit in the prepared remarks. I think the company has gone through a somewhat recent round of simplification already. So maybe could you just give an assessment, is it fair maybe the company didn't go far enough in its previous efforts? And if that's right, do you have a sense of what the hesitancy was or maybe, said another way, why it's clear to you today that there's still more to do? So any color on that would be great.

Brad Richmond, Interim CEO

Sure. When I discuss removing complexity through simplification, I see it happening in two areas. One focuses on short-term opportunities based on feedback from team members and their working conditions. This aspect isn't about the structure of the menu but rather identifying ways to make daily tasks easier. For example, we currently use three different methods to scoop ice cream for Pizookie, but we may be more efficient with just one. There are chances to simplify how we garnish and create drinks as well. These are small adjustments that can have a significant impact on operations. Looking at the bigger picture, the main area for simplification relates to the menu itself. However, I can't give you a specific figure today regarding how much we can reduce the menu by. My strategy for the menu involves understanding each section's composition—assessing the purpose of each item, which items drive traffic and revenue, and identifying areas of imbalance. This analysis will help us find opportunities for simplification and areas where we may need new products to engage our guests. Overall, I think the menu will become simpler, but the reason I can't provide details now is that we plan to methodically and strategically approach the menu architecture, which will inform those decisions.

Brian Mullan, Analyst

Okay. Thank you for all that. And then can you just comment on where BJ sits with brand awareness given your previous experience and backgrounds, maybe any insights or thoughts on how you go about accreting brand awareness of BJ's?

Lyle Tick, President and Chief Concept Officer

Yes. I mean on balance, when you look at unaided awareness, we trail the big competition in our category. And then if you kind of peel that apart in terms of unaided brand awareness by geography for us, we have about half of the awareness that we have in California outside of California. It's why I mentioned earlier, and I do think it's an opportunity. And it's why I kind of referenced it a little bit earlier with the Pizookie Meal Deal; and Brad did too with significantly lower media spend and share of voice than the competition, right? We grew traffic and gained share. For me, this gives me great confidence in both the consumer's affinity for our brand when we are kind of top-of-mind and salient, and it underscores the kind of opportunity and headroom that remains with respect to awareness. I would kind of double-click on that for you; when you look at our media markets, all markets outperformed. Our media markets outperformed non-media markets. And then when you double-click into our non-California media markets, those media markets in terms of a jump outperformed California. That again points to awareness and saliency because we're seeing those gains go across the weekend and the weekday.

Brad Richmond, Interim CEO

So to me, I just jump in and say, those are important learnings for us as we move forward of things we've learned that we can leverage. It's a little bit of competitive insight. So please don't share that in your report for the others to read.

Brian Mullan, Analyst

Okay. Thank you. Appreciate it.

Operator, Operator

Thank you. Our next question comes from Nick Setyan with Wedbush Securities. Please go ahead.

Nick Setyan, Analyst

Thank you. It sounds like the promotional calendar is still in flux, but at the same time, you kind of have settled on a few promotions while you're happy to let a few others go. So how should we think about the promotional sort of cadence going forward? Are we going to have limited time offers? Are we going to have rotating offers? Is the Pizookie Meal Deal here to stay? I guess to what extent is the promotional cadence going forward in flux and to what extent are you now happy with the current slate of promotions? And the heart of the question is, to what extent can we expect continued comp volatility going forward?

Lyle Tick, President and Chief Concept Officer

We're currently in a phase of discovery and learning, so I'll be able to provide more details in our next conversation. We're optimistic about the Pizookie Meal Deal and plan to continue utilizing it into Q4, believing there's additional potential in that program. I can't confirm whether it will be a permanent feature right now, but I appreciate the idea of creating a value platform for our brand that supports our frequency and cycles, rather than relying solely on limited-time offers. At this point, as I gather insights, I'm considering all options regarding what will most effectively drive our revenue and profits. As I mentioned earlier, I believe we need to simplify and remove some of the less effective programs, which will help us focus on those that we know are successful.

Brad Richmond, Interim CEO

Yeah, I wouldn't want you to walk away thinking that what we've learned from the Pizookie Meal Deal is that we're going to tilt heavily to promotion, put promotional activity in different offers. That's not what we're thinking. But we do think it's very appropriate that the learnings and also how do you pulse those learnings during the shorter periods during the year or when you have some really new news you want to share, things like that. I think our sweet spot really is remaining everyday approachable from a price-point perspective, but also from the occasion perspective that Lyle kind of outlined earlier. That's where I see us really winning with this brand and how it's positioned with the consumer.

Nick Setyan, Analyst

Understood. And obviously, the near-term focus has been on Pizookie, and there's a lot of brand equity there. What other aspects of the menu going forward do you expect to focus a little bit more on?

Lyle Tick, President and Chief Concept Officer

Yes. I would refer back to my question about menu architecture. We are currently working on our strategy and menu architecture. However, while I previously mentioned Pizookie as a key area for building our authority and competitive edge, we need to expand beyond Pizookie to establish more areas of authority. We will share more details on this in future discussions, as I want to ensure we align with what the data indicates.

Operator, Operator

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

Sharon Zackfia, Analyst

Hi, thanks for taking the question. I guess I wanted to follow-up on the menu architecture question on kind of the heritage of the company, which was beer and pizza, and it just feels like it's kind of strayed away from that over the years. Is that any kind of heritage that it makes sense for BJ's to try to reclaim?

Lyle Tick, President and Chief Concept Officer

I hate to give unsatisfactory answers given that we're in the discovery mode and doing the strategy and the architecture work. Look, what I will tell you is that, I think that brands derive their authority from their authenticity and what is core to their essence is absolutely important. Usually, when you go through the work that we're going through, you kind of go back to the beginning to understand where the real power alleys were and what was driving the brand. Those often are very telling about where you go in the future because often when brands have trouble, they've strayed away from those things or stopped delivering them in as relevant a way as possible. Our journey will go back there to discover how we go forward. So could that be part of it? Absolutely. But again, without doing the work and the data, I'm not in a position to commit to those platforms today, but again, hope to talk more specifically about that next time we talk.

Brad Richmond, Interim CEO

Yes. And I would just add-on that both Lyle and I have been through a number of these type situations around the menu, and it is so important to get it right. But it's also so important that you get the consumer input. So that's not personal preferences. I mean, I'm not the targeted consumer that we're after with BJ. So while I may have strong opinions, I do think we have to do the work with the consumers to really understand what the brand stands for, what can we deliver on that, and how much modification does it take. So it does take more research time than any of us would like. It takes time to test it or develop it and get it into test, but we do see the menu as a real opportunity for the longer-term success of this business.

Sharon Zackfia, Analyst

Can I ask a follow-up? I assume you're going through the portfolio as well on the restaurants. Are there any kind of meaningful recalibrations of your closures or anything that we should think of within the BJ's network that may come in?

Brad Richmond, Interim CEO

Yeah. I think if you're talking restaurant closures, I mean we've done some deep dives on that. I'm happy to say that we have virtually no restaurants that aren't cash-flow positive for us. That doesn't mean we still need to evaluate our portfolio and those laggards. We need to study them and see what can we do to improve their performance. And once that assessment is done, if we need to close a couple, we're not afraid to do that, but there's no compelling urgency from the data we have so far that says we need to be doing that.

Operator, Operator

Thank you. The next question comes from Jon Tower with Citi. Please go ahead.

Unidentified Analyst, Analyst

Thank you for taking my question. This is Karen filling in for Jon. I apologize for bringing up menu simplification again, but I would like to ask if, in considering a smaller menu, you are also thinking about how that might impact kitchen size. Is reducing the unit footprint part of your plan moving forward? Thank you.

Lyle Tick, President and Chief Concept Officer

As you go forward, absolutely, it could have an impact on how we build the boxes and how we go to market from an NRO point of view. It has obviously those kind of cascading effects. So sure. I mean, in my previous life, I was a big believer in right cost, right size, right place and we did make a fair bit of not only menu architecture work, but then format work. Would I see some format work in our future to allow us to do that? Yes. And is one of the enablers of that potentially menu? Yes. I don't know if that's satisfactory, but hopefully, it gives you a little bit.

Unidentified Analyst, Analyst

Yes.

Brad Richmond, Interim CEO

I'll talk a little bit into. And I'm kind of an agitator to the group, but we have over 200 restaurants. And so we have a box today that we have to make work in what we're doing today. But I think it really raises the question of do we need to have the exact same menu across the company, across the country? So might there down the road be some regionalization of some pieces or parts of that? I don't know, but we're asking those questions and studying it. If it makes sense, we'll definitely test it. We don't know that, but I mentioned this just to show the expansiveness of how we're looking at the business and the opportunity as we move forward.

Tom Houdek, CFO

First, the marketing spend in Q3 was about 1.9% of sales. For the rounding, let me get back to you on that one. I don't have the pieces by adjustment there.

Unidentified Analyst, Analyst

Okay. And that's it from me.

Brad Richmond, Interim CEO

Yes, thank you.

Operator, Operator

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

Todd Brooks, Analyst

Hey, thanks for squeezing me in. First of all, welcome aboard to Brad and Lyle.

Brad Richmond, Interim CEO

Thank you.

Todd Brooks, Analyst

I understand this concept of a kind of a discovery mode and that process of more clarity around the brand. I'm just trying to get an idea of kind of the continuum here that get to driving awareness. So we need to do the work around the brand, what we stand for, how we're going to message. Then as you're looking for driving awareness, are there thoughts on, are we targeting at a national level trying to drive awareness anywhere? Is it in specific geographic markets where you get more bang for the buck? And I know you probably don't want to hamstring yourself with kind of a timeframe to get here, but are we talking about a quarter type of process or just trying to get my mind around how long it takes to complete this journey.

Lyle Tick, President and Chief Concept Officer

The awareness opportunity for us is everywhere. Ultimately, the channels and tactics we use won't just be a pure national push since that's not our footprint, and it wouldn't be efficient. From a media mix modeling perspective, we see opportunities in markets with a greater density of restaurants to invest in broader media channels. Across our footprint, there are awareness opportunities, and it's about using the right channels in the right markets to address that gap. I'm a strong advocate of the test, learn, scale approach. We'll likely conduct some pressure tests in key markets, and if we see positive returns from those tests, we might invest further to expedite our growth and awareness efforts. Regarding our strategy, we will be working on it throughout the fourth quarter and into the first quarter, which will begin to influence our longer-term structural initiatives in the second half. There will be ongoing opportunities to enhance awareness and media strategies that we can start earlier, while more structural changes to our menu will take time. As we layer on these activities, we aim to build momentum over time.

Todd Brooks, Analyst

Okay, great. And a follow-up and then a separate question. I follow quickly. If you look at the 1.9% of sales spent on marketing and looking at your, both of your experiences with other brands, does that feel like the right level of spend for a chain BJ's size and to do the work that you need to, do you expect to have to put more investment behind marketing spend eventually?

Tom Houdek, CFO

Yeah. Each brand varies how they go to market. So I don't think you're going to see it grow really high like some of the big national brands that are heavy media marketing all the time. I do think particularly what we've learned now, some pulsing of national media clearly makes sense. So I would say at this point, we're still sorting through that. So it wouldn't be hard to guide you on that. But we're learning enough about more capabilities than we thought we may have had just a short while ago.

Todd Brooks, Analyst

Okay, fair enough. And then the final one, Tom, if we're looking out to Q4 and thinking about the components of average check, if Pizookie Pass sunsets in October and you talked about the better kind of economics and profit structure around Pizookie Meal Deal, that mix drag that we saw in Q3, is that expected to moderate as you get out to Q4 and we're thinking about same-store sales? Thanks.

Tom Houdek, CFO

Yes, we have noticed that the drag is decreasing as we progress through Q3. In response to your question, yes, our loyalty expansion initiative had the most significant impact earlier in Q2. The effect has diminished as we've moved further into Q3 and begun Q4. You are correct that this is part of the guidance and reflects the latest trends.

Todd Brooks, Analyst

If you step down on pricing into the mid-2s, where would you expect average check to come out with the moderation and the mix headwind for the quarter?

Tom Houdek, CFO

Somewhere in the 1% area, maybe a little less, but yes, somewhere in that 1% area is a good estimate.

Todd Brooks, Analyst

So that's where average check is going to come out, 1%. That's what mix is going to only be down 1%. I'm sorry, I'm confused there.

Tom Houdek, CFO

For the question regarding our expectations for the average check in the fourth quarter, we anticipate it will be around 1%, possibly a bit lower. This is the current best estimate.

Todd Brooks, Analyst

Okay, great. Thank you all.

Brad Richmond, Interim CEO

Thanks, Todd.

Operator, Operator

Thank you. This ends our question-and-answer session, and the conference has now concluded. Thank you for your participation. You may now disconnect your lines.