Image source: BJ's Restaurants.
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Coming into its third-quarter earnings report, there were reasons to suspect weak results from casual-dining chainBJ's Restaurants, Inc.(NASDAQ: BJRI). The stock had fallen sharply after the second-quarter earnings report in July and continued to slide since then, with talk of a "restaurant recession" having swept the industry as a number of peers have reported downbeat numbers.
Indeed, BJ's third-quarter report confirmed those fears. Let's take a closer look.
BJ's Restaurants results: The raw numbers
Data source: BJ's Restaurants.
What happened with BJ's Restaurants this quarter
- As the numbers show, it was an ugly quarter for the brewhouse chain, and the market responded by sending the stock down 7% after hours. Comparable sales were a problem in particular, decelerating from a decline of 0.2% in the second quarter to a drop of 3.4% in the third quarter, as management blamed a number of outside factors for the slowdown.
- Expenses at the restaurant level expanded across the board on food, labor, and occupancy, and overall restaurant-operating margin fell 200 basis points to 17.7% from a year ago. Those additional expenses accounted for nearly all of the decline in profits in the quarter. Restaurant operating weeks increased by 7% in the quarter as the company added five restaurants in the quarter and 14 in the past year, but that wasn't enough to offset weak comparable sales growth on the bottom line.
- Food deflation has also made the gap between grocery and restaurant prices wider than normal, causing some customers to eat in instead of going out. Not all of its peers experienced the same headwinds in the recent quarter, however, as Olive Garden parentDarden Restaurants(NYSE: DRI) reported a 1.3% increase in comps across all its chains in its recent quarter.
What management had to say
Management noted a number of factors that weighed on comps, both at BJ's and industrywide, saying that competition from the Summer Olympics and political conventions and debates kept some customers home, and also said that uncertainty about the election may have dissuaded customers from visiting its restaurant. CEO Greg Trojan noted that the political conventions were aired during dinner time on the West Coast, where the majority of its restaurants are located.
The company also noted a number of promotions it has lined up to boost sales in the fourth quarter, including a new "Enlightened Menu" category featuring new "superfood" options and center-of-plate menu combinations during November and December.
Thus far in the fourth quarter, comparable sales are down 1.5%, marking an improvement from the third quarter, but a decline nonetheless. More importantly, management said the current weakness has caused it dial down its restaurant-opening forecast for next year.
CEO Greg Trojan said, "In light of the uncertain macro environment we are also taking other near-term measures intended to manage risk, improve future returns, and maintain BJ's strong brand while driving shareholder value. As such, we are reducing the number of planned fiscal 2017 restaurant openings to 10 to 15, compared to the 17 restaurant openings this year." Management plans to use the capex savings from the slowdown in new restaurant openings to invest in sales-building initiatives at current restaurants, and it also believes it could see opportunities for reduced rent or better locations in the next 12 to 18 months because of recent restaurant bankruptcies.
Despite the deceleration in growth, the casual-dining chain said it remained confident in reaching its long-term goal of 425 restaurants nationwide from 185 today, underscoring that it was in no rush to reach that target. In the near term, however, it looks as if BJ's performance will remain challenged.
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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends BJ's Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.