Description

Rationale

BJRI has been subject of several VIC write ups - both long and short - in recent years. This one takes the other side of current ebullient sentiment characterized by cheerleading, extrapolated estimates and a seemingly never-ending willingness to apply/justify ever-higher multiples to stocks that are "working" regardless of how unlikely it becomes that resultant embedded expectations will be met. For BJRI favorable momentum dynamics and crowded positioning/favorable flows in domestic-oriented discretionary names complete a positive feedback loop that have taken shares +106% YTD on expansion in NTM P/E from 18x to 34x.

Variant thesis suggests combo of peaking fund'ls and peak valuation creates asymmetric downside. Historically inconsistent SSS pattern including weak traffic trends appears set to return on 1/ lapping of primary company-specific drivers of recent re-acceleration; 2/ diminished tax-stimulus spending benefit following similar pattern to positive gas-price shock impact in 2014-2015; 3/ difficult comps starting in 4Q against a weak trailing 5-yr track record of 2-yr SSS performance; and 4/ cont’d secular headwinds facing casual dining category. On disappointing SSS vs elevated expectations and resultant margin downside given sustained labor headwinds, current peak valuation metrics could mean-revert below recent trailing two-year averages on below-consensus numbers - a combo which suggest more reasonable mid-high $40s levels.

Risks include 1/ cont’d strong momentum dynamics including upside to Street SSS and EPS expectations on under-estimating sustainability of macro and company-specific fund’l drivers; and/or 2/ further multiple expansion on under-estimating complacency/risk appetite or unique US equity-market dynamics including impact of scarcity and passive flows especially in domestic-oriented consumer discretionary stocks. Near-term return on brain damage also a consideration especially into year end as visibility on valuation ceiling for stocks like this one admittedly uncertain given in-play late-stage bull market dynamics including but not limited to lack of respect for risk.

Catalysts include 1/ disappointing 2019 SSS and earnings vs historically elevated expectations; 2/ re-emergence of secular casual-dining concerns on expected broader SSS slowdown; and/or 3/ domestic-oriented flow reversal/positioning unwind. While former is likely 4Q earliest, latter could come anytime and carry is relatively cheap.

While trailing 12-qtr SSS average just +0.4% with six of the 12 in negative territory, recent re-acceleration in 2Q to +5.6% on traffic +2.5% has convinced the “market” to discount more consistent positive SSS trends and a subsequent sustained re-acceleration in unit growth. Opposing view suggests SSS growth is peaking here in Jul-Aug on easiest comps of year (hurricane disruption; Jul-Aug most challenging months a year ago) with tough compares likely to have an increasingly negative impact starting in 4Q for the next four periods. Comps are made tougher by lap of primary drivers of SSS re-acceleration including 1/ slow roast ovens (2Q lap albeit slow ramp); 2/ value in form of intro of Daily Brewhouse specials (2Q); 3/ off-premise/delivery push (3Q) and 4/ add'l technology including handhelds (3Q).

Additionally, precedent 2014-15 positive gas-price shock suggests the positive impact of recent tax stimulus-driven improved spending among company's core demographic may prove transitory. 

Given options-driven lower 1H 2018 tax rate, 1H 2019 EPS growth looks flattish and 2019 consensus EPS of $2.38 looks reasonable only on +4% SSS which historical precedent and tough comps deem highly unlikely. Add'l signals of fund'l peaking include mgmt shifting discretionary deployment in 2Q from share repo to debt paydown at $46/share and insiders selling heavily in mid-$50s. In fact, insider selling has been unusually aggressive including CEO’s recent sale of options that don’t expire until 2024-2027.

Despite historical-low 3-yr forward +MSD unit-growth rate BJRI trades at peak 34x NTM EPS vs trailing two-year range 16-35x or 23x avg. Recent market dynamics suggest valuation won’t matter until there’s a fund’l issue. Understood. But on any disappointment multiple compression from current extremes appears highly likely.   

Updated Background

Based on outsized AUVs ($5.6M) and high-teens RL margins, BJ's appears to be decent concept. There's a FCF story (MSD low-growth yield; deployment historically emphasizing share repo now shifted to debt paydown) and mgmt has slowed unit growth from targeted 10% LT rate to +LSD. Faces same well-known macro issues as other casual diners with several years of negative traffic and cost headwinds putting downward pressure on margins. Strategy is basic blocking/tackling including 1/ menu innovation (i.e. slow-roasting); 2/ technology (mobile, on-line, POS and hand-held server tablets to improve throughput); 3/ efficiency tweaks; and 4/ enhanced marketing/loyalty. Off-premise is run-rate 7.6% vs peers ~10-11% so potential opp'y. 

BJRI exhibits "casual-plus" positioning differentiated by 1/ $25 experience for $15; 2/ menu variety; 3/ occasion variety; 4/ high-energy atmosphere; and 5/ craft beer. Menu is broad (145 items down from 180 peak) but known for signature deep-dish pizza (13%) and in-house brewed beer (prop beer 8%; other beer 3% and alcohol 23%). Avg check is $16 w/ dinner ~50%, lunch ~30%, off-peak ~20% (2:30-5 and after 9PM); customer skews younger and higher income. All units are leased in urban/suburban shopping, entertainment, lifestyle and retail strip centers with highest concentration in CA (33%), TX (18%) and FL (11%). Legacy units average 8.5K square feet; $4.5M investment -> mature 3-5 yrs at $5.5-6.5M and EBITDA $1.0-1.2M (high-teens margins) and cash-on-cash returns 25-30%; CA units do 120-130% of avg. Newer 7.4K square-foot units w/ similar returns based on $3.6M investment, $4.5-5M AUVs and 20% margins. 

LT growth algorithm was +HSD units plus +1-2% SSS (despite trailing 3-yr average SSS -0.1%) and 20% RL margins plus modest op leverage equals +LDD EBITDA grower w/ EPS to grow faster on share repo/deleveraging. NT forecast period below LT targets including slower unit growth of 5 units or +2.5% in 2018 and sub-20% RL margins or 17.3% this year with mgmt recently citing 18% target. Share base -26% from Apr 2014 initial share repo authorization through 1Q 2017 w/ $364M purchased at ~$38 apiece. Estimate $75M FCF this year and $80M next (~5% yield). BS is fine w/ $110M out on a $250M LoC through Nov 2021. 

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.

Catalyst

Disappointing SSS and earnings

Re-emergence of secular casual-dining concerns

Unwind/flow reversal in domestic-oriented consumer discretionary stocks