The Casual-Dining Chain Believes It Will Save $3 Million per Year and Improve Margins by 20 Basis Points by Switching How It Cooks Wings.
BJ's Restaurants CEO Greg Levin exited the third quarter feeling "incredibly optimistic." A year after taking the role of chief executive, benefits of margin improvement initiatives are beginning to show, despite restaurant costs remaining elevated. The company believes there's room to increase margins by as much as 200 basis points, putting it back in the mid/upper teens.
One of those strategies is implementing changes across food inputs. The example Levin used was alterations to BJ's chicken wings. For many years, the chain served a large precooked bone-in wing—specifically made for the brand—that's fried when ordered. The cross-functional margin improvement team suggested sourcing raw jumbo wings, cooking them in slow-roast ovens, and then frying them when ordered. The switch should save an estimated $3 million per year based on current prices and benefit restaurant-level cash flow margins by roughly 20 basis points. The new wings are in all restaurants as of early October.
Levin noted that cost-reducing initiatives are particularly powerful because it means BJ's doesn't have to price as much, which in turn keeps its value proposition in place. Several other savings strategies are in different stages of testing and approval.
"We have made tangible progress over the past quarter of finding meaningful cost-saving opportunities," Levin said during the company's Q3 earnings call. "Our cross-functional team has been actively identifying, vetting, and when appropriate, implementing identified cost savings." BJ's restaurant-level operating margin was 10.3 percent in Q3, down 160 basis points from the second quarter. But that's not too much of a surprise as Q2 is historically the chain's best sales quarter. In fact, that decrease is actually better than the 350-basis-point margin decline between Q2 and Q3 in 2019. The chain attributed the softer margin decrease in 2022 to three factors: cost-saving initiatives, higher same-store sales, and 2 percent pricing in August.
Comps jumped 8.9 percent versus 2021. On a three-year basis, same-store sales have steadily improved throughout the year, moving from a drop of 1.5 percent in Q1 to positive 4.8 percent in Q2 and positive 8.2 percent in Q3. BJ's average weekly sales per restaurant was $111,000, or $5.78 million annualized AUV. That's approximately $8,000 more than Q3 2019. Off-premises is still in the low $20,000s per restaurant, per week—more than double pre-pandemic comparisons—while dine-in is inching upward at more than $91,000.
BJ's has increased menu prices by 12 percent since the start of 2020, compared to food cost inflation of 23 percent in the same period. So far, the chain has seen little pushback from guests. The next round of hikes is planned for January.
Cost of sales was 27.3 percent in Q3, which is 30 basis points better than Q2, but 10 basis points unfavorable to last year. Food costs, while still high, are starting to moderate. Expenses were up roughly 5 percent compared to the year-ago period and up modestly from Q2.
Labor and benefits stood at 37.7 percent, 60 basis points favorable versus 2021 when removing a one-time Employee Retention Tax Credit benefit from the prior year. Labor scheduling tools helped hourly labor costs by 30 basis points quarter-over-quarter. Overtime and training expenses sequentially improved from Q2 to Q3 by 50 basis points on a three-year basis.
"It certainly was great to see everything from training and overtime start to get back to normalized levels," Levin said. "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. ... I would say it's much more back to regular seasonal times."
BJ's margin-focused plans work in concert with a number of sales-building roadmaps, starting with remodeling existing restaurants. The chain added seating capacity in seven stores and upgraded the bar area of a high-volume legacy location by modernizing the woodwork, moving taps to the back wall, and installing a 130-inch TV. Another bar remodel is scheduled for later in October. There are also plans to revitalize two patios in Q4 to increase the number of days the seating can be offered.
In terms of off-premises, BJ's is testing a more high-touch catering experience to help with corporate business, which tends to have bigger frequency and average check, Levin said. Catering grew roughly 75 percent against 2021 in the third quarter, and was more than double 2019 marks. For takeout, curbside, and delivery customers, the chain implemented a digital order tracker that's seeing a 75 percent usage rate among guests. As a nice touch, the tracker is in the form of a pint of beer that fills up with each step. The next goal is launching a new web-based ordering platform before the end of 2022. The design will then used to update the mobile app. In the dining room, BJ's enhanced the functionality and reliability of server's handheld tablets. Additionally, the brand rolled out a digital call-ahead waitlist, which uses AI to determine and communicate wait times. The company has tested the technology for several months and hopes to launch it across the system in Q4.
"Our comprehensive strategy to grow sales, as I outlined in detail on our previous quarterly call, is working, even though we are only in the early innings," Levin said.
"These sales initiatives over the long run will allow us to leverage the fixed costs inherent in our business to drive margin expansion."
BJ's has 214 restaurants nationwide after opening four units this year and recently closing a legacy small-format store that was no longer financially viable. Two more locations are projected to debut in the fourth quarter. Because of supply chain and construction delays, two units expected this year were pushed into Q1 2023. Since there's so much noise around inflation, equipment, permitting, and labor shortages, BJ's hasn't yer finalized its 2023 growth plans, but Levin believes it should be around six restaurant openings again.
The chain is continually weighing the value of opening a new restaurant versus remodeling an exist one. The time it takes to build a store has doubled from 130-150 days to 260.
"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 elevated construction cost there," Levin said. "And while our sales-to-investment ratio are still above one 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 then that we got these high-return remodels, especially when we can add capacity and keep our concepts in a like new first-class and contemporary manner."
Total revenues increased 10.3 percent to $311.3 million in Q3. Adjusted EBITDA was $15.2 million, compared to $16.4 million in the year-ago period. The brand also saw a net loss of $1.6 million, compared to a net loss of $2.2 million in 2021.
Typically, BJ's sales jump from Q3 to Q4 because of the holidays. In 2019, average weekly sales per restaurant grew from $104,000 to $108,000, and the company expects a similar increase this year. Considering the higher sales, an additional 53rd week, and cost-saving opportunities, BJ's believes Q4 margins will be in the low-to-mid 12 percent range.