Analyst at Oppenheimer, and we are thrilled to welcome back BJ's Restaurants to our 2024 Consumer Conference. BJRI is a polished casual dining company, operates 217 restaurants in 31 states, with a long-term growth opportunity to double its footprint. Unit economics are strong, with AUVs over $6 million, armed with a margin expansion opportunity that I'm sure we're gonna talk about today. At Oppenheimer, we have an Outperform rating and a $42 price target, and, and we believe the market underappreciates the future earnings power of the company, particularly as this management team works to build sales and drive margins while judiciously expanding new units. It's our pleasure to introduce BJRI CEO Greg Levin, who joined the company back in 2005 as CFO and became CEO in 2021, as well as Tom Houdek, CFO, a position he's held since 2021.
Thank you both for participating in our conference. We greatly appreciate your time.
A pleasure.
I'd like to start the discussion by just zooming out, and asking about your view of the current state of the consumer. There's been a lot of discussion about choppier overall restaurant trends, driven primarily by volatile patterns with lower-income consumers. You talked a little bit about this on your last earnings call, but can you just maybe unpack for us what behavioral shifts you've been witnessing and your base case thinking for the state of the consumer as we move through the rest of the year?
Yeah, Brian, so as we did note, and I'll you know, Tom, I'm sure, can add on here. As we noted on the end of the Q1 earnings call, we've seen that kind of lower-end consumer. We look at consumers in different cohorts, and about $50,000 and below seems to have kind of reduced their patterns or their traffic, at least in our restaurants. We've heard that from others as well. Taking that out for a moment, the consumers that do come to us continue to spend in a very similar patterns. We have not seen really any check management, that we've noticed when we tend to look at add-ons, which would be appetizers, desserts, add-on soup, salads, sides, and others. That actually has continued to grow from an incident standpoint, with really not much check management there.
We have, as we've said before, seen maybe a little bit of a shift of alcohol moving back to 2019 levels. Our personal belief on that is not so much consumers managing their checkbook, but really more the fact that coming out of COVID, I know that sounds weird, but still coming out of COVID, at least through the first half of last year, of 2023, was still much more celebratory. And I think as you look in the business overall, that first half of 2023 was a pretty high hurdle in regards to comp sales for most restaurant companies, and then comps have come down into the second half of last year. So when we look at our business overall, it still seems very consistent with a little bit of slowness in the lower demographic consumer.
The other thing that we've talked about, we talked about this earlier today as well, is when there is a reason to dine out, especially in experiential restaurants where we play, it's big for us. Continues to drive traffic, see a lot of consumers come. So days like Valentine's Day are very big days for us. Mother's Day was an unbelievably solid day for us, and that's a Mother's Day year-over-year, so we're comping year-over-year. We also see the same thing with graduations in that celebration timeframe. So when there's a reason, consumers continue to dine out, and they'll put, you know, maybe income aside and celebrate from that perspective.
When I think about the business overall and look at it and think about where the consumer is, they are continuing to kind of, like, be discretionary in regards to where they want to spend. You're hearing most restaurant companies lean a little bit more into the promos, whether that's a $5 menu in fast food or other items that you're seeing in casual dining, where they're talking about more of a price certainty in there and talking about more price versus brand, where maybe I think a lot of companies were a couple of years back. I do believe, and, Tom and I have talked about this before, that as you start to get into the second half of this year, despite maybe where we are from the consumer, I think trends just get easier for everybody.
A lot of people don't realize that through the first half of 2023, we were still going over COVID, at least in a lot of states, from 2022. As we got into 2023 last year, we talked about our trends really normalizing. We saw July go back, July, August, September, be normal patterns. We didn't see that in 2022. So I do believe as we get into the second half of this year, there's this opportunity for actually comp sales to increase for BJ's as we kind of lap over still some of that revenge dining from a year ago.
That's a great overview and a great way to start, and I wanna zoom back out as it relates to your business specifically and your investment story and give you a chance to talk about that. You have a clear long-term targeted targeted algorithm to grow sales 8%-10%, and that's built on getting to 5% unit growth, mid-single digit same-store sales. Can you just remind the audience how you landed at these long-term targets? Why is that the correct way to think about the future annual growth of the business?
Yeah. So first of all, on unit growth, we've always talked about the fact that the governor for our growth is really around people. It's not capital. We've got, obviously, a solid financial position on our balance sheet. And it's really not about the finding real estate sites. Our team can continue to find sites. There's not as many casual dining companies growing, so that puts us at the top of top of a lot of developers' lists. And the fact that we do so much in guests per square foot, that we are a draw to a lot of centers. B ut at the same time, because we have a larger menu, it's more complex, what we're trying to do in this kind of polished, but do it with kind of a mass casual pricing, that execution's so vital to us.
That's what makes great restaurants. Great restaurants really come down to great execution within the four walls. We think somewhere around 5%, maybe, you know, up a little bit from there, is where we can do it with quality. And we'd rather be a growth story that's about quality versus a growth story that's certainly just all about quantity. We've always prided ourselves at BJ's in the fact that we've never had to put out that press release saying that we're closing, you know, 20% of the restaurants that we've opened over the last three or four years, 'cause generally, the majority of our restaurants all make positive cash flow. So we've never run into that because we take our time to select the right sites to build the BJ's brand. And again, it's something we wanna do with quality.
Where we also think about our business longer term is being in this varied menu space, which sometimes can be challenging, doesn't prohibit us from going into so many different locations. We're not specialty that might play to certain tonier consumers. And having that kind of varied menu with kind of unique differentiation and that polish, polished spin, really should allow us to get from where we are today, from 200 to 300 and 400. So we're really bullish about the future of BJ's moving forward, which probably gets you to your next question, that is, you know, growing new restaurants. And we said this at our Investor Day discussion back in November, we wanna grow restaurants when we have nailed our margins on our existing restaurant base, and are continuing to consistently grow top line positive comp sales.
Put those two together as we continue to build out our long-term cadence of new restaurants. We continue to work through that. That should allow us to accelerate new restaurants. In addition to that, the adjustment in our prototype that we've been working on and pushed into next year will allow us to reduce our investment costs by about $1 million, which we used to build restaurants for about $5.5 million pre-COVID, or so it went all the way up to $7.5 million. The adjustments that we believe we'll be doing now will get us back down to about $6 million net.
So where we wanna be, something we continue to look at, see if we can take that next step to bring it down, but knowing that we got to play in this polished casual, that's that differentiation, which is so important for us.
Great. And yeah, I mean, your, your performance of new units recently has been very strong, suggesting that you certainly have earned the right to grow. And on the remodel side of the CapEx budget, you, you've already completed 13 remodels this year. You plan to complete 10 more. As we look beyond 2024, how many more units within the portfolio need to be remodeled in a way that's, you know, accretive to the business? And maybe talk a little bit about the economics of remodels, because they've been a big focal point of the CapEx budget recently.
Yeah, so at the end of this year, we'll be somewhere around 65 restaurants that have been remodeled. And we will then continue to look at the next class to do that. I think we have talked somewhere, and Tom, correct me if I'm wrong, somewhere around 135 or so, I think that can be remodeled. I don't know if that sounds about right. What I would tend to tell you a couple things here is, we continue to target somewhere around cash-on-cash returns in the 20% range, and that comes from really an annual sales lift. That sales lift seems to be a consistent sales lift, meaning it didn't have a honeymoon and then come back down and kind of set itself up at a nice higher run rate that we, you know, had measured it against.
And, and obviously, that's gonna include some of our bigger restaurants that we need to go into and continue to bring them forward. Our newer restaurants, or the existing restaurants, will have a little bit probably different profile. They're a little bit newer on some of them. We won't have to spend as much money, so we're still targeting around that 20% cash-on-cash return. They might not have the same sales lift, because the more money we spend, we wanna see an increased sales lift. But there's opportunities that we've been looking at in regards to remodeling our existing restaurants that will be less expensive. A lot of them are due to the fact that maybe the beer taps are already on the back wall. That's expensive for us to remove, to move all of our beer taps.
So it becomes a little bit lower of a cost initiative for us. But we do believe over the next couple of years, we'll still have an opportunity for remodels. It'll just go a little bit less than where we are, currently.
Great. And, as it relates to the trends of your business and your same-store sales, you guided the second quarter to be slightly negative, but this suggests pretty consistent traffic improvements from the beginning of the year. So you're seeing improvements there. And then we talked at the beginning of the discussion about how comparisons do ease in the second half of 2024, and clearly, those comparisons easing can be a catalyst for getting those same-store sales to turn positive. But outside of the comparisons, can you talk to us about what are the most important drivers for your sales trends are in the second half of the year?
Yeah, we believe where we are right now is, or there's different ones, but one of our big areas is to really improve our throughput in our restaurant. As we've gone through and looked at our consumer research, pace is not something that we're strong on, and it's something that we have a huge opportunity within our business to get faster. We also know that our Net Promoter Scores, one of the biggest correlations is pace. In regards to the consumer having a good experience in our restaurant, pace rates up there are really high. So we've looked at our staffing models. We made some adjustments there to put more servers on the floor, and optimize that a little bit so we can get to the guests sooner.
We know that summers around a first order coming in, not a first greet, but a first order of a menu item coming into our, into the kitchen of around four minutes. Four minutes really dramatically improves pace scores for our restaurants and allows us to have throughput and turn tables faster. That's a big initiative for us going forward, and something that we're investing in right now. We mentioned it on the Q1 call, that that's gonna be an investment in some labor right now. Thankfully, because of everything we did last year, it allows us that opportunity to invest in that aspect of labor. As you know, last year, we reduced our menu, we changed the way we did some prep and other procedures, and that allowed us to pull out labor.
Now, we're not putting back all that labor back into our business, and right now there's some inefficiencies that go along with it. But we are seeing increased pace time in our restaurants. We're seeing our servers able to spend more time with our guests to drive our NPS scores up. We know higher, higher NPS scores will drive comp sales into our business. And then, we continue to work on our menu. And we talked about this again at the Investor Day. We wanna touch about 70% of our menu. We've got kind of a three-year strategy there. A lot of people think of a menu as a barbell strategy. It's really not a barbell as much as it's kind of just a bar, meaning we've got a good, better, best strategy.
We wanna continue to make sure that we offer items in the Good, especially, where things are today, where people are looking at price point and affordability. And know for us to continue growing our business, going into the markets that we go into, that that Good strategy has gotta be solid in regards to where mass casual is. Then from there, we wanna continue to make sure we draw on the Better and Best, where guests can indulge. And we see that today, like our Rib-Eye is one of our number one selling items. I think coming out of COVID, going into more consumer items, going into items that maybe when you do dine out, you wanna indulge a little bit more, allows us to kind of create on that aspect of the menu to drive that part of it.
And then we continue to lean into the cult of what we would call the Pizookie. The Pizookie drives so much awareness that we wanna continue to lean into that aspect of our business to continue driving us forward. Excuse me. One of the last ones here is the loyalty program. Our loyalty program is really a very solid program for us. We drove a lot of new members in there. This first quarter, we had a big membership initiative. We wanna harness that going into the second half this year to drive that aspect of our guests. Prior to COVID, we were probably in the low 20% of our business being in loyalty. We got out of that coming out of COVID, where it kind of moved into the teens, and there was this opportunity to move that forward.
Those guests spend more in our restaurants, they come more frequent, and more importantly, we can engage with them on a one-on-one basis to drive their frequency. So that's a big aspect of driving the business forward.
Great, and Greg, you talked earlier about, you know, when we talked about the consumer and the macro, about how, you know, guests that are coming are still spending similar amounts. But, you know, the price value appeal of your menu has always been a strong characteristic, and undoubtedly, the industry is getting more promotional. Are there, are there levers that you can pull at BJRI to compete in a more promotional environment and get that incremental guest that's looking for value?
Well, first of all, your first part of your statement is, is very correct. The environment has moved away from maybe a branding message and awareness message to being more promotional, and traffic driving. And we need to look at that and think about how we play in that differently. We do have great value items in regards to our Daily Brewhouse Specials. We've got lunch specials. We obviously have happy hour and so forth. We need to talk more about that. So if I had to think about a messaging strategy, our messaging strategy is, is evolving, getting back to talking about some of the promotional items that we have or good price point items that we have.
So when you think about, again, that kind of bar strategy versus barbell strategy, we wanna make sure we're telling guests that you can come in on a Wednesday, which is a loaded burger day, and get our, all of our great burgers at $12 or $13 with unlimited fries. We wanna tell our guests that on Mondays, it's half-off pizza, and these are things that we've had for a long time. You can come in and get a half-off large pizza at BJ's. So we wanna continue to lean into some of that. It'll also dictate a little bit of our menu strategy. How do we continue to evolve our menu strategy? How much do we wanna lean into things like surf and turf, versus how much do we wanna lean into things that might drive additional incidents?
We know that working on appetizers, and working on appetizers that fit a certain price point, will help drive attachment rates or incidents in our restaurant. We also know that working on the, what we would call maybe the wow cocktails, things like our Tipsy Snowman, our Grand Patrón Margarita, that allows guests to mix up when they're already coming in for a celebration event and drives the incremental mix. So we wanna play into all of that, but I do think the messaging starts to change a little bit more about telling the value that we already have on our menu, versus maybe the messaging around pure experiential.
Great, and I wanna move the discussion to restaurant margins, because that has been a very impressive part of the results recently. In the first quarter, underneath a very difficult sales environment, margins were up 240 basis points. Your second quarter guidance assumes margins are up another 100 basis points, again, despite difficult sales. Can you first start the discussion by unpacking what's really driving this margin expansion in your model, more recently?
Now, I'm gonna take a very high level, and then I'm gonna turn it over to Tom. And from a high level, it really comes down to the fact that our restaurants are staffed, and the operations feel very much pre-COVID. And I hate to kind of go back to the COVID days, but there was that inflation in getting people staffed. And when you have that in line, you can get efficiencies. You know, we talk about this with new restaurants a lot, Brian, and you've heard me say this before, that it's a little bit like college sports, where you've got a great team, and guess what? They all graduated. So you're reloading with freshmen, you know, and red shirt freshmen, so to speak, or red shirt sophomores, I guess. That's where it felt a couple years back.
Now, the team has their sea legs under them, shrinking down the menu a little bit last year. All of that has allowed for greater operational efficiencies that happened from, frankly, the men and women in our restaurants, and very appreciative to them. Now, you layer that on where Tom has led the team in regards to some of our cost-saving initiatives, and Tom, you might wanna go through those.
Yeah, absolutely. Yeah, what we saw in Q1, even with, you know, the January, with the weather impact, we still saw some really nice year-over-year gains. And yeah, it was, y ou know, if you rewind even, you know, in the recent past, it was reducing the menu, which took prep hours out. It was a lot of different actions across our food costs, just to bring those down, while maintaining quality. And really, in Q1 too, we're starting to see some of the initiatives in our O&O line really bringing our facilities cost down, looking at kitchen and dining supplies, how to be more efficient there.
As we look forward, really, as we go into the back half of this year, we have a new contract we're rolling out with a different disposables supplier that we're taking product and just putting it through a more efficient channel, and that's gonna save $2 million annualized, starting in the second half. As we look at the labor line, we're now, you know, we have a great model right now. We have an AI forecasting tool, so our restaurant managers have a good tool to see where sales should be coming in, so that's helpful in terms of setting their labor schedules for the week in terms of food prep. We're taking it one step further and having the next tool be auto-populating labor schedules.
With that, it's just, again, adding some efficiencies by day, by hour, by shift, you know, which we have high hopes for the back half of the year. We're still in the test process, and we don't have a dollar amount assigned to that. But, you know, it's just a couple examples of this cost savings initiative, this margin improvement initiative that's been ongoing for almost two years now, still bearing fruit, still finding some really great wins across the organization. Because we know, you know, we don't wanna just lean into price to get our margins up. We wanna be creative and find these ways to take out just inefficiencies in the business, things that our guests don't see. So we're still finding some really great wins there.
And as you exit 2024, you've talked about potentially being at a 16% margin exit rate going into 2025, yet, you know, consensus only forecasts 15% margins for full year 2025. And I know it's not your job to build consensus or to pay a lot of, you know, attention to consensus, but what do you think the disconnect is here? Because if you are indeed exiting 2024 at margins of 16%, if that were to happen, theoretically, wouldn't that suggest a path towards 16% margins in 2025, or is that maybe not the right way to think about that exit rate?
It's you know, we talked about this a bit on our Investor Day in November of last year, where really, as we think about margin over the course of the year, Q4 is a good proxy for the full year. We saw it in 2019, where our Q4 is about average in terms of sales, so it's, as we kind of look forward across the whole year, it's about an average margin. So, yeah, as we, you know, talked about at our Investor Day, really we wanted to be in those mid-14% exit rate in Q4 of last year, which we met.
As we look to keep building margins, it's a combination of everything Greg outlined of our sales-driving initiatives, but really combined with, you know, the types of margin improvement, the initiatives, we still keep finding some good fruit in those trees. And, you know, there is another round of menu pricing that we need to evaluate for that September-October timeframe. So the combination of all those things, you know, and again, the consumer backdrop could either help or hurt from the original plan. But from everything in our control, we're still seeing, you know, some great progress, and nothing's changed in our view.
Thanks. Thanks for that. Yeah, the margin story is very intriguing at BJRI. I wanna ask about California. It's been about two and a half months since AB 1228 went into effect. And look, I realize that you are not directly affected by this, obviously, but it doesn't stop people from discussing it, even when discussing BJRI. Can you update us on maybe how you are thinking this could or maybe could not impact your business, whether that be from a traffic perspective, wage rate, employee turnover? Just any thoughts around AB 1228, and maybe whether people should or should not think about how it impacts you?
You know, I'll take kind of a broader macro one. I think probably add a lot to this. One is, I think from a broader perspective, it's gotten so much attention that I think in the minds of the consumers, it's, "Oh, my God, everything in California is gonna cost X." And that does impact overall restaurant dining out. And there's a lot of the discussion at times of like, "Well, man, your value, wow, BJ's value versus fast food is that much better," and it is. And I think that over time helps people discover us and understand that across the board. But at the same time, and, I've always said this, fast food and even fast casual, they're different dining occasions.
Driving somebody home from soccer or whatever it might be, if you're, you know, on the weekends, you've got to say to yourself, "Do I have an hour?" Or even as good as we are from an off-premise perspective, it's still a longer experience versus we can go into X, Y, and Z and get something really quick. So then if you go into a fast food restaurant really quick and you're spending X dollars, you start to go, "That hurt my pocketbook a little bit." And I think that's where, overall, it can have a bigger effect on the macro environment in regards to dining out. At the same time, we need to lean in and tell people about then the value of coming to a BJ's, so they can find us to use it on different occasions. And I think over time, that'll win for us.
Now, that being said, I think at the labor line, it really hasn't impacted us much, but even from a turnover or wage rate, I don't know, Tom, you could probably go into that in more detail.
We continue to watch it, and I will say, I mean, in terms of our team members in California, certainly the kitchen is already very near what these AB 1228 wages are. Plus, our servers are getting the $16 an hour plus tips, so they're well ahead of it. So there's really not that many areas or you know, that going into it. We were pretty, you know, I would say cautiously optimistic, but thinking it wouldn't have been that big of an impact. Plus, we've seen, you know, plenty of the new fast casual or fast food open near our restaurants with big, big banners outside, starting at, you know, over $20, and we haven't seen that type of trade.
So, you know, we went into it cautiously optimistic, and there has been no impact in the business. We haven't seen any outsized increases in wages. We've been tracking that closely, and we haven't seen any increases in turnover. We've actually measured it the month or so since the implementation, and our retention in California is even better than it was in the first part of the year before the law came into place. So we're liking what we're seeing, but we're continuing to monitor it. You know, it is a market-by-market, restaurant-by-restaurant game out there. We've got to make sure we're keeping our best team members that are gonna serve our guests, so we want to keep watching it.
But in terms of the economic impact to us, nothing to report to date, which is a positive.
Great. Just kind of with the couple minutes we have left, the BJRI financial model generates pretty good free cash flow, even after CapEx for growth and remodels and investments. How do you think about deploying that capital as it relates to share buybacks and other? I think at the Investor Day, you talked about 2024 buybacks being above 2023. Just any update on capital allocation would be great.
Yeah. So a couple things. It's, you know, first, our share repurchase or buybacks should be above 2023. In Q1, I think, I don't know if I mentioned this on the call or not, but we didn't have any share repurchases, and that really was due to the fact that we were working through cooperation agreements with our activist investors. So it just kinda kept us from going out there and buying shares. So taking that aside, if you think about the free cash flow, we should be buying back into shares because we're throwing off a lot of cash flow. However, we're gonna do it in an opportunistic.
We're also gonna do it a little bit to make sure that we're managing the increase in shares that happen each year from grants to the management team and to our restaurant operators and so forth. Generally, though, when we put together our plan, we look at investing in our restaurants first. We think that's the best return from our capital. And, as I said before, capital is not a governor really to new restaurant growth. It is really about the management and hiring of people. So we put that cap on there. We look at that, what we can do in regards to the physical ability of people able to do remodels as well and figure out which ones have the right return. So we'll put that on there as number two.
And then from there, number three is gonna be the opportunistic buyback, stock. So it's kind of allocating those three, and I do believe that continues to be our strategy going forward.
Great. Well, with that, we're actually already out of time. That's BJRI. At Oppenheimer, we have an Outp erform rating and $42 price target on the stock. I want to thank Greg and Tom for participating.