Good day and welcome to the BJ's Restaurants, Incorporated Third Quarter 2022 Earnings Release and Conference Call. Today's conference call is being recorded. At this time, I'd like to turn the conference over to Greg Levin, Chief Executive Officer and President. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone and welcome to BJ's Restaurants fiscal 2022 third quarter investor conference call and webcast. I am Greg Levin, BJ's Chief Executive Officer and President. And joining me on call today is Tom Houdek, our Chief Financial Officer, we also have Greg Lynds, our Chief Development Officer on hand for Q&A afterwards. After the market closed today, we released our financial results for the fiscal 2022 third quarter. You can view the full text of our earnings release 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 to questions. Rana, please go ahead.

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 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause 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, Obtober 20, 2022. 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?

Thanks, Rana. BJ's third quarter results be our internal forecast showing our ability to leverage extra sales growth and drive incremental profit, despite the ongoing inflationary environment. While our sales have continued to recover nicely on a comparable restaurant basis, restaurant costs remain elevated impacting restaurant level margins, compared to our historical levels. However, we have seen a more recent moderation of inflation and we are beginning to see the initial benefits of our margin improvement initiatives, which when combined with our sales driving initiatives give us the opportunity to expand our margins back into the mid to upper teens over time. From the top line sales perspective, our quarter three comparable restaurant sales increased 8.2%, as compared to the same quarter in 2019, which accelerated from 4.8% in the second quarter on the same three year basis. Likewise, comparable restaurant sales increased 8.9% over the same quarter in 2021. Looking at our different sales channels, dine-in comparable restaurant sales traffic trends improved in the quarter, reflecting our ability to staff at higher levels, ensuring that guests know they will be taken care of with our gold standard level of service and gracious hospitality during every visit. Our dine-in comparable restaurant sales have now beat the casual dining industry as measured by Black Box on a three year basis every quarter in 2022. In fact, we increased our dine-in sales lead over the industry in each quarter of 2022 and the third quarter represents our widest lead yet over the industry during the pandemic era. Off-premise sales also remain very strong and continue to pace at more than double pre-COVID levels. Even as dining room traffic recovers, we continue to see very healthy sales levels for both takeout and delivery. Our comprehensive strategy to grow sales as I outlined in…

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 $311.3 million. Our sales increased approximately 10% percent versus Q3 of 2021 and 12% versus Q3 of 2019. On a comparable restaurant basis, sales increased by 8.9%, compared to Q3 of 2021 and by 8.2%, compared to Q3 of 2019. Our three-year comparable sales accelerated from negative 1.5% in Q1 to 4.8% in Q2 to 8.2% in Q3. The comparable sales improvement in conjunction with certain savings we started to realize from our margin improvement initiative and the benefit of our August pricing round help partially mitigate the typical margin decline that accompanies our seasonally lowest sales quarter. Our restaurant level cash flow margin was 10.3% in Q3 of 2022 or 160 basis points lower than Q2 of 2022, which tends to be our highest sales quarter seasonally. As a reference point in 2019, our restaurant-level margins declined 350 basis points from Q2 to Q3. So we are encouraged by the factors that helped offset a meaningful portion of the typical seasonal margin decline in Q3 this year. Adjusted EBITDA was $15.2 million and 4.9% of sales in our third quarter, behind Q3 2021 reported levels. As a reminder, we had a $3.1 million employee retention tax credit in conjunction with the CARES Act that benefited our labor and benefits line in Q3 of 2021. When removing this one-time benefit, our adjusted EBITDA and adjusted EBITDA margin, both improved this quarter from a year ago. We reported a net loss of $1.6 million and a diluted net loss per share of…

Thank you. [Operator instructions] And we will go to our first question from Alex Slagle with Jefferies.

All right, thanks. I had a question on capital allocation. If you could kind of talk through a bit more how you're thinking shifted over the last few months with the restarted buyback efforts and the plans to expand the remodel program in ’23. Maybe just what you're seeing in the business with -- and with the remodel tests, and I guess just how this in your views the broader development landscape have evolved at this point?

Yes. I'll start off, Alex and sure Tom or even Greg Lynds, our Chief Development Officer might be able to add in here. So I think on a broad picture getting restaurants built on time is probably been a big challenge for us in the industry. I think it used to take us some near about 130 days to 150 days to get a restaurant built, if maybe even a little bit earlier than that or quicker than that and it's basically double. It's somewhere in the 260 range or so to get restaurant built, that's how we started to push at this. At the same time, we still like the sales levels and returns we're getting from new restaurants. But because of the challenges of getting restaurants done timely and just the supply and demand, we continue to see an elevated construction cost there. And while our sales to investment ratio are still above 1 based on the solid sales of new restaurants, it just makes us frankly, kind of, take a look across the board as to how we want to allocate capital at the current time, where we want to have that right balanced approach of investing in new restaurants knowing that now we've got these high return remodels, especially when we can add capacity and keep our concepts in a like new first-class and contemporary manner. So I think as we go through this year knowing some of the challenges on the construction side, pivoting a little bit more towards remodels, being able to drive that sales, that will help drive the improved margins and economics in those restaurants. I would say that's as higher priority in our business as opening new restaurants, as well as some other sales building initiatives. I think third on that three legged stool is the capital allocation program and we'll continue to evaluate that in regards to share repurchases, but we don't want to do it at the expense of being able to invest back into remodels at our sales building initiatives and building new restaurants. I don’t if Tom or Greg, is there anything to add to construction or anything you've seen?

This is Greg Lynds, I think from a construction standpoint, when you think about what's happening in the future here, if we're out to bid right now, we're going to feel all the pressures at that the development cycle has right now. So you're seeing not only the construction costs, but you're seeing entitlement delays, permitting delays, inspection delays, and we do see that abating next year. So in terms of building our pipeline, we're really looking for mid to late ’23 and 2024 type projects when we see a lot of this abating.

Thank you, Alex.

[Operator Instructions] And we'll go next to Jon Tower with Citi.

Right, thanks for taking the questions. Just a few, if I may. The quarter-to-date commentary that's encouraging in terms of what you're seeing for same-store sales. I'm just curious if maybe you could give us any sort of color into perhaps if the California stimulus is helping that number at all? Or if you're seeing this more spread across the system?

Sure thing, John. We've looked at it when the stimulus has started earlier this month and I would say Southern California has been outperforming on average, and it continues to. So there might be a little bit there, but it really hasn't shown up in any big way in the numbers. So we're happy to have it. But it does look like the business itself was performing well before and is still where we like it.

That's great. And curious, maybe going back to the commentary regarding fourth quarter margins and specifically getting into the food cost inflation, I don't think -- I think you offered it, you said 5% or so for the third quarter. But I'm curious to see or hear what you're seeing for the fourth quarter and if you're starting to be able to lock into 2023, if you have any insight into how that's forming at least the start of the year?

Yes. The -- as we're going into the fourth quarter here, the two main factors is, one, just the overall commodity cost; and then two, the margin improvement initiatives and the benefits we'll see there. So we're still seeing -- even from Q2 into Q3, we still saw modest inflation. So there -- going into Q4, we're not modeling in any deflation. There could be some help from the margin improvement initiative. But going -- as we look into next year, we are expecting more inflation. We're still early days with walking in our contracts that most are ones that we would set in January, so early to really determine what levels yet. But yes, as we're looking into next year, anything that's kind of processed and labor driven, it could be going up. So it's early to tell, but we are expecting some inflation going into next year on more of the contracts that have been locked for the year. But otherwise, we're seeing some inflation at those levels. We're also seeing some good movements in the fresh meats and the grocery, the produce that have been -- are ones that we pay market rates for.

Yes. I think Jon, and this is Greg, just kind of adding on there. I still think we're going to see another -- I wouldn't say inflation going up, but I don't think we're going to see it coming down right away. I think as a lot of contracts are on an annual basis, as we go into next year, that labor number, which is an input into everything is still going to result in a level of negotiations with our vendors from a contract standpoint. I still think you'll see the same thing come in January as well, just with states adjusting minimum wages, thankfully being in California, the California dollar step-up is done even though it's not tied to CPI, so there will be an increase there. But as a result, I think we're going to see still a little bit more inflation going into Q1 of next year and then I think it will start to abate after that timeframe after contracts get locked in and companies move forward. It also gets to Tom's point earlier, that we have not yet assessed what our pricing is going to be in January, because we're going through it here in this kind of fourth quarter to understand where we're going to be from an inflationary standpoint and make sure that we take reasonable pricing to offset that.

Awesome. I appreciate all the color on that. Just going back to the 200 basis points of margin improvement at the store level over time based on the initiatives that you've kind of dug into during the call, including the chicken wings, et cetera. Is that incremental to just underlying improvement that you expect in the business, meaning hitting that mid-teen store margin target that you discussed, is that including that 200 basis points? Or would that 200 basis points be additive?

I think it's a combination of both. Ultimately, we'd like to be above that -- let's call it, mid-teens. We want to continue to drive that. Some of that comes with sales. So when you start to look at those numbers, it's always a function of the dependent variable of sales that play through to it. So it's additive in one sense, but at the same time, if sales don't continue to perform, it's going to be inclusive in it.

Okay, got it. I will pass it along. Thanks for the time.

Thank you.

And so we'll go to our next question from Nicole Miller with Piper Sandler.

Thank you. Good afternoon. Can we just reconcile the price in 4Q? I had about 8% then I wanted to see if that was right. And then if you don't, let's just say you don't take price in January, knowing that it is under consideration. Does it ratchet down a couple of hundred basis points in February when you took price in this year?

Hi, Nicole, so in Q4, you're -- I'm sure, asking for the year-over-year change in price. We'll be carrying a kind of 6% area into Q4.

Okay, okay. Yes, I said that wrong. I meant I was getting up to maybe almost 8% when we added the 200 basis points in August. That's exactly what I meant. So thanks for reading my mind. But -- so 8% is a little too high. It's like the 6% range in 4Q, so something must be coming off in the prior year.

Correct. We took 1.4% in November of last year, which will roll off.

Okay. So 6% as you get into 4Q? And then if you don't take price for 1Q of next year, you get down -- you'd be around 4%, something like that in February?

This is about right. We're going to lose about 2%, 2.5% of pricing that would come off in kind of mid-January.

Okay. Perfect. So I just wanted to level set that so we can get the comp, right? And is there anything -- yes.

And just to make sure I have the right Q4 number, it's 6.5%. So that's the full number.

That's super helpful. And can you just talk a little bit about the contract then of mix and traffic in terms, meaning almost 9% comp in 3Q and traffic was quite a bit less than -- or excuse me, price was less than that. So how is mix and traffic playing out?

We -- so it's a great question. We are still seeing more guests per check and more incidents, higher incidents in our checks. So people and guests are coming into our restaurants, they're spending more. So there's an element of better mix that we're seeing in our checks, because our check is higher than just the pricing alone. So we're getting an additional benefit from the increased mix to go along with the pricing.

Okay. And then just a final one, Greg, I also found your supplier commentary pretty fascinating. So is there anything in the underlying health of that business getting more back on track in terms of like stuff getting to you on time and there were substitutes and out of stocks, which I guess, to your point, made you kind of reinvent certain things like around the chicken wings that's interesting. Can you just talk about the delivery times and the product they're bringing and how that's trending. And again, just cover that mid-teens margin otherwise and then another 200 basis points, I mean that's pretty outstanding, but yet you maybe would invest against that. Is that the way to think about that? I just want to get that conclusion right.

Yes. So let me handle a couple of those things. So on the distribution side, things are continually improving. They are not perfect by any means, but they are getting better. And the things that you hear about in the airline industry, to the hotel industry, to the restaurant industry, that being also seen in the distribution or trucking industry in regards to drivers or things coming out of processing plants and so forth. But it is getting better, and it's moving in the right direction for everybody. So I do think going into next year, we're going to see even more consistency there and not having to worry about substitutions and out-of-stock areas. So that's the first part. It's not back to where we want to be, but it's getting better every day just like our restaurant staffing levels continue to get better. And then in regards to margins, the hard thing with discussing margins at times is people want to talk about margins outside or absent of sales levels. And this business leverages or deleverages a lot based on sales levels. So when we talk about the 200 basis points that we're going after, a lot of that is based on where we are today. But I can tell you, if our sales stay exactly where they are today and don't grow next year, the 200 basis points won't necessarily show up in a positive way per se, on our P&L, because we'll deleverage from other inflationary costs. So we need to grow top line sales. I think everybody in this industry sometimes just thinks about margins as such a independent variable versus being a dependent variable on sales. So when we talk about our capital allocation programs, we want to make sure we're investing in remodels, because…

Thank you for that. Appreciate it. Thanks guys.

And Nicole, just to -- I want to make sure we get the pricing levels out there. So for the quarters this year, just so everybody has them, we were up about 5% year-over-year in Q1 and then about 6% for Q2 and Q3 and Q4, so about 6% is the -- where we've been for Q2, Q3 and Q4 as we've taken price and lapped price.

And we'll move to our next question from Drew North of Baird.

Great. Thanks for taking the question. I wanted to circle back to recent top line trends. Your results suggest some nice acceleration in comps exiting Q3. So wondering if you could share some perspective on what you think drove the strength in comps exited in the quarter? And then perhaps why you think the underlying growth versus pre-pandemic or 2019 settled a bit here in October, when excluding the impact of the hurricane? And then just are you willing to share what the quarter-to-date figure would be including the impact of the hurricane, just to level set us there?

Yes. Drew, I'll take the first part on this. We are looking at that as well, trying to look at the business and see the nice comp sales, and it's come down a little bit in Q3, still obviously very solid comp sales and mid single-digits in the 6%-plus range, as Tom talked about. And looking at the business and trying to understand the business a little bit, I think what we saw, and this is a little bit of the data and what we've seen in front of us is during the latter two months of the summer timeframe, we started -- we saw larger parties. I think it's what you see in kind of the leisure and hospitality world where people wanted to take trips, they want to get on airplanes, they want to get to hotels and spend that kind of leisure and hospitality. And so our guests per check was higher in the summer months and -- versus where our guests per check is now. And it seems like that's probably a little bit of a difference in our business between where we ended Q3 and where we are today. And what we're seeing when we look at that is we're really seeing a return to kind of pre-COVID trends. And that is, as we get back into the October timeframe, sales bottom out a little bit and we start to grow a little bit in the holiday timeframe. And that tends to be what we've seen in our business. Now as Tom mentioned, when we look at incidents per check or incidents per guest, those are still high. We're still selling a lot of appetizers, back above 2019 level. We're still selling more alcoholic beverages above 2019 levels. So that incident seems pretty much in line there. It's just the party size has actually gone down a little bit, going into kind of the end of Q3 and here into Q4. And then in regards to comps, I'll let Tom take it, but it's getting less and less every day. So I think what we're trying to talk about this is kind of where we see a run rate, but Thomas, anything you want to add to that?

Yes. The most impacted week was the first week. This is about the Hurricane Ian question you had. Our first week of October was the most impacted, and it was about a 100 basis point impact to comp that week. So we're three weeks in, so it would have weighed about, call it, 30 bps or so on this three week window, rolling it out through the quarter, it won't be material, but I just wanted to kind of adjust for it for these early weeks as it's more material for just looking over 3 weeks.

Thank you. That’s helpful.

Sure. Thanks, Drew.

And we'll go to our next question from Joshua Long with Stephens Inc.

Hey, thanks for taking the question. Just wanted to circle back, you might have mentioned it, and if so, I missed it, but when you talk about trends through the quarter, from an average sales basis, was that relatively steady? I think that's what we had talked about in 2Q, but just curious if there was any sort of upward downward trajectory during the quarter from an average of sales basis.

Josh, not really. I think it all really played out much more seasonally like we'd expect. So when you're talking about an average weekly sales, it's going to be higher in July and August than it was in September after Labor Day. And so we saw that historical seasonal trends come back into our business. And I think that's the way we're tending to look at even here in Q4 is the business now reminds us a lot of how 2019 weekly sales average trends play out. Because the difference is, obviously, we got the inflation and supplier challenges, et cetera, that we didn't have in ‘18 or ‘19. But from a top line sales perspective, very consistent, and I would even say off-premise trends tend to work the same way as well, meaning after Labor Day, off-premise sales came down, same percentage of sales, but came down to kind of match up a little bit with the weekly sales -- the seasonality of sales trends.

Got it. That's helpful. Thank you. And then when thinking about some of the large investments you made in your human capital side earlier in the year with, I think, something around the nature of 6,000 hires. It sounds like that's progressing well from getting those team members ramped up and you're relatively pleased with efficiency. Any sort of additional comments you can provide there? And then when we think about the need to add on or supplement some of those efforts with ongoing hiring and efforts at the store level. Can you put that in perspective? Is it -- are we in kind of a more normalized range now where those additions would be balanced against some of the seasonal trends we're seeing and just kind of the normal backfilling of the pipeline as it were?

Yes, that's a good way to frame it up, Josh. The improvements we saw over the quarter, I mean, it certainly was great to see everything from training and over time start to get back to normalized levels, still not exactly back to 2019 pre-COVID levels, but much closer to it. So as we think of the new team members that we hired in Q2 that we talked about, the big ramp-up in our staffing, we're really starting to see the efficiencies now in really the third quarter we saw in the numbers, but into the fourth quarter here. So -- and I would say it's much more back to regular seasonal times. We increased our sales going into Q4, and we typically staff up a bit more ahead of the holiday. So it's -- we definitely want to keep adding to our team member base, so we can drive the most sales as possible in Q4, but it feels much more seasonal than anything still pandemic-related.

Got it. That's helpful. And then last one for me. In terms of thinking about 4Q, am I correct in that there's going to be a 14 -- or an extra week to 14 weeks in the 4Q period? And if that is correct, anything you'd point to or talk about in terms of leveraging that extra week, especially as we lap over what might have been kind of a partially impacted 4Q from Omicron last year?

Yes, you're correct. We do have a 53rd week here. And as we forecasted, it is looking back to last year, but also looking back to the trends of ‘19, which seasonally, we can see where we leverage the fixed cost. You get some leverage on the labor lines, you get some leverage on the more the fixed elements of the restaurant costs and corporate costs in that -- just from the seasonal benefit of sales, but then also some of those fixed costs as well into the 53rd week. So as we guided on the restaurant level margins that was inclusive of that benefit we'd expect.

Great. Thank you.

Thanks, Josh.

And then we'll go to a question from Todd Brooks with The Benchmark Company.

Hey, good afternoon. Just a couple of wrap-up questions here, if I could. On the 200 basis points of savings from your cost and efficiency work. If you -- if we look at a recovering sales environment, what's the window to harvest those savings? How long does it really take to extract those if the sales are improving?

Yes. It's probably through the first half of next year or so. Some of the things will come in faster. Some will take time to roll out. And Todd, we've talked in the past even about the wings. And we've been talking about the wings probably about 90-days, and we were just able to get them through supply chain here in October. So as we go through and test some other items that we have out there and things that we're looking at to get those lined up and supply chain and rolled out, take longer, then wow, this is great, can it be implemented by Wednesday of next week, meaning can we get it done in seven days. So I tend to look at that aspect of it. At the same time, Tom has talked about the labor scheduling system and things that we put in place there, and we've seen some really nice improvement on labor. I think even to the other question that Josh asked the fact that we've gotten ourselves staff and team members have gotten their sea legs under them. That's improved our operational capability as well in the restaurants. But we still have some areas to go there as well that will continue to work through. So I think it's a gradual roll in over the next two to three quarters, including Q4 here.

Perfect. Thanks, Greg. That's helpful. Another quick one, the six openings that are targeted for next year, are there any, as of now anticipated closures against those? And do you have a kind of a quarterly opening cadence beyond the two that you're sliding into early Q1?

As far as the opening cadence, I think we're looking at two in the first quarter. I don't know, look towards Greg Lynds and Tom here. In regards to closures, we've got a couple of leases that we're continuing to take a look at and we'll make decisions on them. Most of them are leases coming up at the end of the year, and we're just trying to figure out, do we stick with that or do we relocate them in another area. As far as our legacy small footprint restaurants, I think there's a handful of those that as those come up, we will continue to evaluate those as well. But there is no initiative in place as of today that says, let's go and close 10 restaurants. It's mainly about the lease negotiations on a few restaurants here or there, but nothing too significant or too material.

Okay. Great. And then just a final one for me. Greg, on the last call, you hinted it continued work around menu rationalization and going through and testing some changes there. I guess where does that process stand? And if you are making any changes to shrink the menu, when should we expect to see that?

Great question, Todd. We do have in restaurants right now a smaller menu. I think we reduced somewhere in the neighborhood of about 20-plus menu items, some single source items, some kind of SKU rationalizations and so forth. We will let that test for somewhere in the neighborhood of three to six months and taking a look at that. And based on that work there, we would see -- if semi is fruitful on where we want to go with it. We'd end up seeing a smaller menu somewhere towards the middle of next year. We generally roll out new menus in the January timeframe because that's menu pricing. We do have pricing somewhere in the May, June timeframe. And then as we just said this year, we do a new menu in the kind of September, October timeframe. So right now, a smaller menu is not scheduled for the January timeframe. We'll let the test through the holiday timeframe. So if we ended up with a smaller menu, that would come in the June timeframe. I will say this though, just in general, we need to bring down that menu, so we can introduce new menu items that our culinary team is building in the pipeline. So more likely than not come to June time frame, we will see a smaller menu. But at the same time, it might not be a -- it might not be 20, it might be a net 15, because we might end up introducing five new items at that time.

Okay, great. Very helpful. Thanks, Greg.

My pleasure.

And our last question comes from Brian Mullan of Deutsche Bank.

Hey, thank you. Just a question on the late night business. Wondering what level of sales have you recaptured versus 2019 as of the third quarter? I'm just curious if you decided if all those operating hours are back? Or if maybe you made a decision that some of them might not come all the way back based on any analysis, I know in the past you were looking at?

Sure. So the afternoon daypart has been the one that's outperformed all others throughout this pandemic time. And in Q3, late night was a very, very close second. And that's without increasing any hour. So we're still -- we're about a half an hour per restaurant on average less per day. So it is the late-night daypart that we just haven't increased hours in a lot of our restaurants. And some of that is making sure we're doing the right thing for our team members and our managers and balancing it from the sales we'd expect, but even without that extra, call it, half an hour, the positive comp sales on a three year basis is -- in some weeks, it's higher than afternoon. Sometimes it's right below. But our late night daypart is very well performing.

Okay. So just to clarify, is the late night average weekly sales back to where they were in 2019 in some total? Or is there still --

Yes, above.

Go it, okay. And then just a follow-up --

It’s -- go ahead.

You know, go ahead. I’m sorry.

I just wanted to make sure that was clear that, yes, on a comp basis versus ’19 yes we're well above 2019 levels currently on a dollar basis.

Got it. And then just a follow-up, a similar question, but just the lunch business. I know you referred to the afternoon daypart, I don't know if that's separate, but could you just speak to the lunch business for 2019? Is that all the way back? And if not, are there some initiatives that you can proactively look at to drive that business specifically next year and beyond?

Yes. It's back to 2019 levels. We're happy about there. We did come out with a $10, $11 lunch menu. So we've got some great value in there. So we're getting the traffic back. But it's -- part of it is the -- as day parts go in the middle of the week, if people aren't back in the offices, they're not fully using casual dining for this lunch business. So it is back to 2019 levels. But in terms of growth, I think as you see the more people come back to offices that only gives more tailwind to that lunch business.

Thank you.

Thanks, Brian.

And so that does conclude today's question-and-answer session and today's call. Thank you for your participation. You may now disconnect.

Thank you, everyone.

Thank you.