Updated Research Report on BJ's Restaurants - Analyst Blog

On Apr 3, 2014, we issued an updated research report on BJ's Restaurants, Inc. BJRI.

On Feb 19, this casual dining reported fourth quarter results with earnings and revenue in line with the Zacks Consensus Estimate. However, earnings were down 77.7% year over year due to higher costs and expenses.

Though revenues were up year over year, it was primarily due to a 12.0% increase in operating weeks. Comps declined 2.7% due to a 2.3% reduction in guest traffic as a result of a shortened holiday season and the impact of a severe winter. The decline in comps also reflects decrease in average guest check due to increased discounting and higher promotional activity.

Higher costs also had an adverse impact on margins. Operating margin contracted 380 basis points reflecting a spike in the overall cost structure. Though management strives to handle the cost pressure through marketing and operational initiatives as well as prudent menu price adjustments, these are yet to bear fruits. Due to the weak performance, estimates for both 2014 and 2015 largely moved downwards over the last 60 days.

Meanwhile, as this Zacks Rank #5 (Strong Sell) restaurateur continues to open stores in new markets, we expect increased pre-opening expenses and stiff competition to act as headwinds.  Also, BJ's Restaurants has limited international presence. This limits its scope to grab a share of the global market. Further, higher taxes in California and increased gasoline prices limit discretionary spending.

However, like other restaurant chains, BJ's Restaurants is also busy expanding in an uncertain economy. Over the next five years, the company expects to double its restaurants from the current count of 147. With capacity growth, the company is gaining scale advantage, which will help generate cost efficiency in the future. Moreover, several sales building initiatives like a guest loyalty program and catering might aid the company's earnings, offsetting cost escalation in the future quarters.

Other Stocks to Consider

Some better-ranked stocks worth considering in the restaurant industry include Ignite Restaurant Group, Inc. IRG, The Wendy's Company WEN, and Jack in the Box Inc. JACK. All these stocks sport a Zacks Rank #1 (Strong Buy).