We recently downgraded our rating for BJ’s Restaurants Inc. (BJRI), which owns and operates a chain of high-end casual dining restaurants in the United States, from Outperform to Neutral, on a host of factors including cautious consumer spending pattern, increased competition from other casual dining operators and increasing commodity cost.
More than two-thirds of total company restaurants are located in areas which have been hit hard by the economic downturn.
Third-Quarter Results Ahead of Estimates
BJ’s third-quarter earnings of 20 cents per share surpassed the Zacks Consensus Estimate of 15 cents, indicating a rise of 67% from 12 cents posted in the prior-year quarter. The better-than-expected results were driven by comparable-store sales growth and higher traffic, both of which leaped for the third consecutive quarter.
Revenues for the quarter soared 24% year over year to $128.8 million and also outperformed the Zacks Consensus Estimate of $124.0 million. The upside in revenues was aided by 14% extra operating weeks, compared with the year-ago quarter. Comparable-restaurant sales for the quarter grew 6.7% as against a drop of 1.6% in the prior-year quarter.
Outlook
For fiscal 2011, the company plans to open 12 to 13 restaurants compared with 10 restaurants in fiscal 2010.
Downgraded to Neutral
We believe BJ’s Restaurants remains well positioned to sustain its growth momentum while generating improved earnings on the heels of efficient operations and innovative offerings. These help the company to drive traffic and post positive same-store sales growth.
The company also boasts a debt-free balance sheet. With a slow revival in the economy, the company plans to accelerate its unit growth in 2011, and believes that there is room for at least 300 restaurants.
BJ’s Restaurants is likely to face slight increase in the cost of commodity basket for the fourth quarter of 2010 primarily on account of higher cheese cost and some of its meat products. Total commodity basket is expected to be up 2% to 4% for fiscal 2011.
Guest traffic was down 4% in the third quarter, and management expects negative guest traffic comparison at least for the foreseeable future. Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, and high household debt levels, which may adversely affect their discretionary spending, and in turn the company’s growth and profitability.
Additionally, estimates have not budged in the last 60 days, implying no near-term catalyst. Hence, we downgrade the stock from Outperform to Neutral.
BJ’S RESTAURANT (BJRI): Free Stock Analysis Report
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