We are reverting back to Neutral recommendation on the casual
BJ's Restaurants Inc.
) from Underperform based on consistent growth in revenues, a
relatively benign commodity cost outlook and the company's
expansion projects, which will provide it with greater scale and
consequent cost efficiency, going forward.
Why the Upgrade?
Although BJ's Restaurants' earnings per share have not increased
year over year for the last three quarters, its revenues are
marching ahead reflecting a strong business model. Its comps have
outperformed the Knapp-track industry average over the past seven
years ending 2012. During this period, BJ's comps grew roughly
28%, while Knapp-track's record for average sales per casual
dining restaurant declined 6--7%.
The Orange County, CA-based company aims to open at least 425
outlets in the U.S. over the long run. With capacity growth, the
company is gaining scale advantage, which will help generate cost
efficiency in the future.
BJ's Restaurants anticipates the cost of commodity to increase
around 2% in 2013, down from its prior expectation of 2.5%. In
the preceding quarter as well, BJ's had slashed its expected
commodity inflation rate from its prior expectation of 4%. Higher
prices for cheese, poultry, and beef are expected to be offset by
lower prices for seafood, produce, soups, sauces and dressings.
However, despite these enthusiastic facts, some concerns prevent
us from being too optimistic on the stock. The company's bottom
line is suffering mainly due to an unfavorable cost structure.
With the company's foray into new markets, we expect slowdown in
comps and increased pre-opening costs to act as deterrents, going
forward. A relatively smaller scale and the lack of advertising
strength compared with its larger peers is another negative for
Other Stocks to Consider
Other players in the same industry, which look attractive at
current levels, include
The Wendy's Co.
The Cheesecake Factory Inc.
Burger King Worldwide Inc.
) all carrying a Zacks Rank #2 (Buy).
BJ'S RESTAURANT (BJRI): Free Stock Analysis
BURGER KING WWD (BKW): Free Stock Analysis
CHEESECAKE FACT (CAKE): Free Stock Analysis
WENDYS CO/THE (WEN): Free Stock Analysis
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