DRI - BJ's Restaurants Looks Attractive At Current Levels

2023-07-19 22:49:26 ET

Summary

• BJ's Restaurants Inc. is expected to see revenue growth due to price increases, improving service levels and increased demand for dine-in services post-pandemic.
• The company's margins are likely to benefit from price increases and lower hiring and training costs.
• Despite macroeconomic challenges and inflationary pressures, BJ's Restaurants' focus on improving customer experience and pent-up demand for dine-in services make the company a good investment.

Investment Thesis

BJ’s Restaurants, Inc.’s ( BJRI ) revenue growth should benefit from carryover impact of recent price increases and potential price increases moving forward in the year. In addition, the company is also experiencing pent-up demand for its dine-in services post reopening which should help it increase sales in addition to price increases. Further, the company has been focused on improving the guest experience which is helping its same restaurant sales. I believe these tailwinds should help it offset the near-term macroeconomic challenges arising from tight consumer spending in an inflationary environment.

On the margin front, the company should benefit from price increases, and lower hiring and training costs as its restaurants are nearly fully staffed now. Given the company’s good growth and margin improvement prospects and attractive valuation, I have a buy rating on the stock.

Revenue Analysis and Outlook

During the COVID-19 pandemic, BJ’s Restaurant’s sales growth was affected by restaurant closures. However, as restrictions eased and full seating capacity was restored post-pandemic, the company saw a boost in its sales as a result of pent-up demand for dine-in.

In the first quarter of 2023, the growth momentum continued. The company saw good demand for its services during lunch and late-night day parts, contributing to sales growth. In addition, the company’s sales growth also benefited from price increases and new restaurant development. This resulted in a 14.3% YoY growth in sales to $341 million. On a comparable restaurant basis, sales increased by 9% YoY, reflecting mid to high single-digit benefits from pricing and low single-digit traffic growth.

Looking forward, I believe the company should be able to continue delivering revenue growth as it benefits from price increases, improving customer satisfaction, and pent up demand for dine-in services post reopening.

Just like the rest of the industry, BJ’s Restaurants has been increasing prices in order to protect its margins from inflationary pressure. The company took price increases in the latter half of 2022 and additional prices at the beginning of the current fiscal year. The company hasn't been seeing any pullback in demand due to these price increases and it has been beating the industry performance both in terms of sales and traffic growth.

During the first quarter earnings call , CFO Thomas Houdek commented:

One metric we also watch after the pricing rounds is just how we're trending versus Black Box. So we get weekly both sales and traffic data from Black Box. And through last year through this year, we've been beating the industry and that margin hasn't changed. We track it right after we take pricing, and usually, it's not that visit that will impact, it will impact the next visit. So we watch it in the coming weeks and months. And it's been very consistent with the -- our trends versus the industry and how much we're ahead. So it's -- at least it's not impacting us any more than the industry. It seems like it's being accepted.”

This implies that consumer demand for BJ’s Restaurants continues to remain better as compared to the rest of the industry. The company is planning incremental price increases in October, which along with the benefit of recent price increases should continue to support comparable restaurant sales moving forward.

In addition to pricing, the company has also been focused on improving overall guest satisfaction. In line with this, the company has been investing in AI tools to give a better experience to customers. For example, the company introduced a digital call-ahead waitlist. This digital tool calculates and communicates accurate table wait times to guests via digital and automated voice channels. Furthermore, the company has been focused on increasing table turns at its restaurants. Post-pandemic, BJRI faced staffing issues as the labor market tightened significantly. However, the company has improved its restaurant staffing levels meaningfully and is now experiencing effective table service and an increase in table turns. I expect that as these new employees become more efficient in their daily tasks, table turns will increase even more. Additionally, the company also brought in third party janitorial services, which should improve efficiency and service levels. These improved services should continue to support consumer demand for BJRI.

While there are near-term concerns regarding slowing consumer demand in an uncertain macroeconomic and inflationary environment, I believe there still exists a lot of pent-up demand for dining services. The pandemic and related restrictions created a lot of pent-up demand for services like hotels, and dine-in. This should continue to benefit the dine-in food service industry. This pent up demand along with price increases and improving guest experience should help the company to weather the macroeconomic slowdown. Overall I am optimistic about the company’s sales growth prospects.

Margin Analysis and Outlook

Over the last fiscal, the company’s margins were adversely impacted by high food costs, labor wage inflation, and incremental costs associated with hiring and training new employees.

In the first quarter of fiscal 2023, these headwinds continued to impact margin expansion. However, the company was able to resume margin recovery with the help of price increases and cost-saving initiatives more than offsetting inflationary headwinds. This resulted in a 280 bps YoY increase in restaurant-level cash flow margins to 12.6% and a 290 bps YoY increase in adjusted EBITDA margin to 7.3%.

Looking forward, I believe the company should be able to continue recovering margins. As stated in the revenue analysis, BJRI has been increasing prices to offset inflationary woes. The carryover impact of recent price increases and potential price increases later in the year should help the company offset high food and labor wages. Moreover, BJRI has also improved its labor profile meaningfully over the last few quarters and is nearly fully staffed at all of its restaurants. This should result in lower hiring and training costs moving forward. Improving staffing levels should also increase table turns and allow productivity gains, supporting margin recovery.

Valuation and Conclusion

BJ’s Restaurants is trading at a discount compared to its casual dining peers on an EV/EBITDA basis based on consensus estimates.

The company has good growth prospects ahead as it benefits from price increases, pent-up demand for dine-in services, and improving guest satisfaction. Margins should also benefit from price increases and lower hiring and training costs. I believe that these growth prospects when combined with attractive relative valuation compared to its peers make the company a good buy.

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