BJ's Restaurants - Q1 2024

Transcript

Operator (participant)

Good afternoon, and welcome to the BJ's Restaurants Q1 2024 earnings release conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Rana Schirmer, Director of SEC Reporting. Please go ahead.

Rana Schirmer (Director of SEC Reporting)

Thank you, operator. Good afternoon, everyone, and welcome to our fiscal 2024 Q1 investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2024 Q1. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. I will begin by reminding you that our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from the projections in the forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise, unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission. We will start today's call with prepared remarks by Greg Levin, our Chief Executive Officer and President, and Tom Houdek, our Chief Financial Officer, after which we will take your questions. With that, I will turn the call over to Greg. Greg?

Greg Levin (CEO and President)

Thank you, Rana. BJ's delivered another quarter of improving restaurant-level margins and overall EBITDA growth, overcoming the challenging January weather, which impacted guest traffic industry-wide. Our improving results reflect the benefits of the strategies we shared at our Investor Day in November. These strategies focus on driving sales through our Familiar Made Brewhouse Fabulous culinary initiative, building our awareness over time, our people initiative around hospitality and gold standard level of operational excellence, and a welcoming contemporary ambiance through our remodel initiative. Our holistic approach also addresses margin expansion through productivity and cost savings initiatives. Taken together, these strategies have established a foundation for future financial and restaurant growth and the enhancement of shareholder value. As we mentioned on our 2023 Q4, Q4 call in mid-February, comparable restaurant sales were down approximately 5%, six weeks into the Q1 due to impacts from the winter storms.

However, as weather largely normalized throughout the rest of the quarter, our comparable restaurant sales improved, resulting in comp sales being down only 1.7% for the quarter. The improvement in comp sales throughout the quarter came primarily from improved guest traffic. Q1 2024 also marked our twelfth consecutive quarter of beating the industry as measured by Black Box. Furthermore, our restaurant margins continued to expand and rose to 15%, representing an increase of 240 basis points from the prior year, despite the January weather impact. On a reported basis, adjusted EBITDA in the quarter rose to $29.4 million, inclusive of some one-time G&A costs, which Tom will discuss shortly. Excluding these one-time expenses, adjusted EBITDA would have been approximately $31 million, or approximately 25% higher than the prior year, and 9.2% of sales.

Tom will discuss our margin growth initiatives that generated strong Q1 results in more detail in a moment. However, as we stated before, we continue to expect restaurant-level margins to expand again this year based on the foundation we have established. Therefore, despite ongoing sales choppiness that we expect through the first half of 2024, as we lap the final aspects of COVID revenge dining and begin lapping the more normalized pre-COVID seasonal trends that we experienced in the second half of last year, the foundation that we are building will position BJ's to further close the gap to our pre-pandemic restaurant-level margins. Our solid results are a testament to our team members, who continue to execute against our strategic initiatives to improve the overall dining experience for our guests while driving impressive margin growth through our productivity and savings initiatives.

To this point, both our hourly and management turnover is lower than it was in 2019 and lower than last year. Our more ten-year team, coupled with our culinary strategy focused on Familiar Made Brewhouse Fabulous and our initiatives underway, has resulted in both guest and operating benefits measured by faster service times and improved social sentiment scores compared to a year ago. As we bolstered our team last year, we implemented our Gracious Hospitality initiative to enhance our already high hospitality standards and scores. The first part of this initiative focused on new server scripting. With this new server scripting driving improved hospitality scores... This month, we began rolling out our enhanced service model, which balances the number of tables per server, food runners, and quality fast expediter positions in our restaurant.

These changes allow servers to get to our guests sooner, so we can get the food into the kitchen faster. It also frees up our managers so that they have more time to be in the dining room to make sure we are delivering the gold standard level of operational excellence for our guests. Overall, we expect this initiative to help improve throughput in our restaurants so that we can handle even more demand. We expect the rollout of this initiative to take the better part of Q2 and Q3 of this year, and will have a slight impact on training labor for these quarters. We also continue to execute against our remodel initiative that is similarly driving improved sales and traffic. We have completed 13 remodels year to date and expect to do approximately 10 more this year.

By the end of 2024, approximately half of our restaurants will either be recently remodeled or one of our newer prototypes. We also continue to open new restaurants in a balanced manner, and in Q1, we opened one new restaurant in Brookfield, Wisconsin. This is our first restaurant in Wisconsin, and it's off to a very strong start, demonstrating the broad appeal of the BJ's concept in so many different regions of the US, which, again, reinforces our conviction that there is the white space for further expansion to 425 or more restaurants, which is approximately double our restaurant count today.

Our next two openings this year will be in the second half of 2024 and will be our newest prototype that will cost approximately $1 million less to build, bringing the investment cost down to around $6 million on average, and that's net of landlord allowances. The new prototype will also provide greater operating efficiencies while incorporating our learnings from our remodel initiative, including lighter colors and a more contemporary bar, featuring a 130-inch television as the focal point. Our long-term cadence in the business is to drive top-line sales in the 8% to 10% range through a combination of 5%+ unit growth and comparable restaurant sales in the low to mid-single digits.

However, as we've always said, we are going to do so with the right quality and at the right investment cost to continue to drive strong new restaurant investment returns that deliver shareholder value. At the same time, we continue to expand margins through sales leverage and productivity and savings initiatives. Our continuous focus on optimizing the business and our solid financial cadence results in significant free cash flow, which will translate into enhanced shareholder value over the medium and long term. Now, before I turn the call over to Tom, I would like to recognize three outstanding board members that are retiring from BJ's board upon the June eighteenth annual meeting. They are Jerry Deitchle, our former Chief Executive Officer and Chairman of the Board, Pete Bassi, our Lead Independent Director, and Larry Bouts, who has served as our Chairman of the Audit Committee.

All three of them joined BJ's in 2004 when we had less than 30 restaurants. These insightful board leaders helped shape our company over the last two decades and have paved the way strategically for BJ's to develop into one of the finest casual dining concepts. We are grateful for the tremendous legacy they leave and really want to thank them for their leadership and their years of service to BJ's. Now, let me turn it over to Tom to provide more detailed updates from the quarter and current trends. Tom?

Tom Houdek (CFO)

Thanks, Greg, and good afternoon, everyone. I will provide details of the quarter and some forward-looking views. Please remember, this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. For the Q1, we generated sales of $337 million, which was 1.2% less than last year. On a comparable restaurant basis, Q1 sales decreased by 1.7%, including the impact from heavier than usual winter weather in January. From a weekly sales perspective, we averaged approximately 120,000 per restaurant. Our strong and efficient restaurant execution, as Greg just outlined, in conjunction with cost savings from our margin improvement initiatives, helped BJ's again improve margins in the quarter.

Our restaurant-level cash flow margin was 15% in Q1, which was 240 basis points better than a year ago, demonstrating again the benefits of our ongoing initiatives to drive efficiencies and the solid foundation we are building for continued growth. The winter weather in January also weighed on margins, which improved through the quarter as our sales returned to more normal and predictable levels. Adjusted EBITDA was $29.4 million and 8.7% of sales in the Q1. Q1 EBITDA beat the prior year by more than $4 million, with a margin that was 140 basis points higher, despite both more extreme winter weather and certain extraordinary costs in G&A that we'll outline later in my remarks.

We reported net income of $7.7 million and diluted net income per share of $0.32 on a GAAP basis for the quarter, which were both more than double levels from a year ago. Now I'll provide more details on sales trends in the Q1. Heavier than usual winter storms impacted industry-wide sales through lower traffic in January. Our comparable restaurant traffic declined approximately 9% in January before recovering to negative mid-single digits in February and March. Also, during the quarter, we began scaling back the degree of menu pricing compared to last year. In January, we took a pricing round in the mid-1%, which was lower than our January 2023 pricing round by more than 200 basis points, creating a comp headwind in the quarter as we lap over last year's elevated pricing round....

As Greg mentioned, the foundation we are building allows us to take a more balanced pricing approach to maintain our traffic-driving value while adding appropriate menu pricing to deliver profit dollar and margin growth. Our check growth moderated to the mid-single digits in Q1, compared with mid-7% check growth in Q4 of 2023. We carried pricing in the upper 5% area in the Q1. Our late-night business continues to outperform other day parts, which adds a modest check headwind, as guest checks tend to be lower than other day parts. We also continue to see some check management in our off-premise channel and alcohol sales returning to pre-pandemic incidence levels. Putting the traffic and check pieces together, our comparable restaurant sales improved from approximately -5% in January to -1% in February to flat in March.

The improving comp sales levels were driven primarily from improving traffic trends through the quarter. Our comp sales performance also represents BJ's twelfth consecutive quarter of beating the industry, as our comp sales were 220 basis points better than the Black Box Casual Dining Index in Q1. Our on-premise business remains our strongest, most profitable, and most differentiated channel, with comp sales slightly negative for the quarter, but modestly positive if removing winter storm-impacted results in January. Moving to expenses. Our cost of sales were 25.2% in the quarter, which was 140 basis points favorable compared to a year ago, and 30 basis points favorable compared to the prior quarter.

Food costs were about flat quarter-over-quarter, with inflation of key items such as wings, salmon, and chicken breasts, offset by savings from our cost savings initiatives, including the full quarter benefits from our new meat sourcing program and certain reformulated sauces. Labor and benefits expenses were 37.1% of sales in the quarter, which was 50 basis points favorable compared to the Q1 of last year. These gains were despite the extreme winter weather in January that impacted sales and deleveraged our labor line in the month. We continue to drive efficiencies with our simplified menu and AI-based sales forecasting tool used by our restaurant operators.

A number of the labor efficiency metrics we track, including items per labor hour, were better this quarter than pre-COVID levels, illustrating how high level our restaurant teams are operating at, as well as the effectiveness of our cost savings initiative to date with respect to refining and optimizing our labor model. Occupancy and operating expenses were 22.8% of sales in the quarter, which was 40 basis points favorable compared to the Q1 of last year. We increased our marketing spend by 30 basis points from last year to build additional awareness and drive traffic to our restaurants, so the underlying benefit was 70 basis points in O&O, excluding marketing. We continued to find additional ways to save and operate more efficiently.

For example, in Q1, we drove savings in our repair and maintenance expenses with a new approach to facilities planning and spending. G&A was $23 million in the Q1, inclusive of several one-time and extraordinary charges, including more than $800 thousand of legal expenses related to our shareholder cooperation agreements and $300 thousand of severance from personnel changes. We also had more than $800 thousand of deferred compensation expense in the quarter linked to fund performance in our deferred compensation plan, which was approximately $500 thousand higher than an average quarter in 2023. As a reminder, this is a non-cash item that has an offsetting entry in the other income and expense line in our P&L. G&A was in line with our plan and guidance when removing the extraordinary expenses in the quarter.

Turning to the balance sheet, we ended the Q1 with net debt of about $39 million. We repaid $10 million of debt and ended Q1 with $58 million drawn on a revolver. CapEx was $22 million in Q1, about $5 million less than a year ago. Moving to more recent trends, comparable restaurant sales in the first four weeks of Q2 have been down modestly, similar to Q1 levels. At the beginning of Q2, we rolled over another larger pricing round from last year, reducing our year-over-year check growth by nearly 300 basis points. At the same time, our guest traffic decline has been improving each month, with April being the strongest month yet, helping mitigate some of the comp sales impact from the lower carry pricing.

While there is still an element of choppiness in sales, as Greg outlined, we are encouraged by the improving traffic trends, and because of our cost savings and productivity initiatives, we expect to continue growing margins this year. Additionally, our guest value scores, which we view as a key indicator of brand health, have improved as we've taken less pricing this year. In fact, our Q1 value scores are up 300 basis points from Q4 levels, and our April value scores were even higher. Looking ahead, and assuming recent trends continue, we expect slightly negative comp sales in Q2, taking into account the check headwind due to less pricing and improving traffic trends. As a reminder, our Q2 tends to be our busiest quarter, especially in May and June, with Mother's Day, Father's Day, and graduation celebrations.

Our ability to drive sales and traffic in those peak weeks are critical to driving a very successful quarter. We are confident that we have the right leaders, team members, menu, and initiatives targeting gracious hospitality and speed of service in place to deliver record-setting sales in our busiest weeks of the year later this quarter. Factoring in recent trends and expectations for comp sales to be slightly negative, we expect restaurant-level cash flow margin to be in the mid-15% area in Q2. This guidance incorporates some additional food cost inflation we've experienced in recent weeks and changes we are making to our labor model in certain markets to increase hospitality and pace, which requires extra investment in training and will lead to inefficiencies during the rollout period.

We then expect to continue expanding year-over-year margins in the second half as we grow sales through strategic initiatives and make additional progress on our margin improvement initiatives. Our goal is to close the gap to 2019 margins and finish the year with an exit rate in Q4, approaching 16% restaurant-level cash flow margins. Specific to California, we are not directly affected by AB 1228, that increased minimum hourly wages for fast food and fast casual workers on April 1st. We continue to pay competitively and have not experienced increases in team member turnover or wage inflation in the state recently. In fact, our hourly team member turnover in California remained better than pre-COVID levels in April.

To date, we have not taken any extra menu pricing in the state as a result of this law, but we will continue to monitor the market and will act, if necessary, to protect margins and profitability. We expect G&A to return to a more normal level of approximately $21 million in Q2, and excluding the extraordinary expenses in Q1, G&A is still on track toward the $82 million-$84 million range for the full year. In conclusion, with significant cash flow from operations, expanding sales, and a healthy balance sheet, we have the financial flexibility to execute multiple initiatives to enhance shareholder value. We are focused on delivering value to shareholders through sales and productivity initiatives and through our disciplined approach to capital allocation, including for new restaurant openings and restaurant remodels, which both continue to generate strong economic returns.

We have a clear path to sales and margin growth ahead, and our long-term strategy and the strong consumer appeal for the BJ's concept, position us well to continue building on our successes and enhancing shareholder value. Thank you for your time today, and we'll now open the call up to your questions. Operator?

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press Star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Alex Slagle with Jefferies. Please go ahead.

Alex Slagle (Equity Analyst)

Thanks. Hey, guys. Congrats. Good, good momentum here. The margin performance really stood out, and especially relative to the expectations we had in the low 13% range for restaurant-level margins. I mean, it was up and down the restaurant expense categories. So I just wonder if you could size up the contributing factors a little bit more. I realize it's not just one thing. I mean, there's sales leverage and cost efficiency measures kind of in a lot of places, but just trying to get a better feel for what changed and, you know, how sustainable some of these dynamics are.

Tom Houdek (CFO)

Sure. Thanks for the question, Alex. And it really was strong performance across the lines, as you mentioned. Sales did recover nicely, so we saw a pickup in sales, which was consistent. But with that, we also had a good quarter in terms of where commodities sat. They came in a little under where we were expecting, so that did help. Some of the initiatives that we rolled out certainly offset and some of the inflationary pressures. Where we really saw some nice leverage as well is across labor. We operated really well in our restaurants. Once we got through the winter weather, we had some really strong restaurant operations that were very efficient in terms of the labor scheduling.

So when we saw the sales became predictable, we really had a nice flow through in terms of labor. And then finally, down to O&O, seeing the repair and maintenance expenses come down, we have been more conservative in terms of what we've been spending in terms of third-party delivery promotions there. So we've really refined what we spend on and where we're gonna cut and find some efficiencies. So more to come, but no, appreciate the question. It really was outperforming what even our expectations were in terms of what we were able our restaurants were able to operate at.

Alex Slagle (Equity Analyst)

Yeah, that's great. And so some of the labor scheduling, I mean, is there more to do there, like tech-enabled labor scheduling pieces that maybe you haven't rolled out? I just wasn't sure where you were in those things, but, you know, good job working through all the volatility through the weather.

Tom Houdek (CFO)

Yeah, thanks. Last year, we had rolled out to our restaurants an AI-based sales forecasting tool, which helps both prepare their labor schedules, but also how much food to prep. So those continue to be refined, and we're seeing better outcomes from those tools and getting our sales forecast even tighter at the restaurant level. So that is a continual process of refining and making that better and better. So yeah, the sum of that was included, if you think of Q4 into Q1, the benefits of that tool are just getting better.

Greg Levin (CEO and President)

So, Alex, a big part of that, and Tom mentioned it, really is nailing down your weekly forecast. We've said this before, and you know, you and others understand that if you have the right forecast in place, the ability to manage against that, both on cost of sales, because you're prepping correctly, works for you and gives you a huge benefit in food cost against your theoretical, and then the same thing for labor. As we continue to work labor, we right now want to continue to work our AI tool in regards to the in and out times and getting better around the shoulder. I think there's still opportunity in our restaurants to be more efficient, really around that shoulder period.

As we mentioned on the call today, we are doing some changes which are gonna allow our servers to take care of our guests even better. But one of the big benefits on that is really getting more of our managers into the dining room area. And by being in the dining room area, we can see the shoulders of the shift and how they're transpiring through the day. And that's a huge unlock for us. That's gonna allow us, I think, some additional benefits over time. But it is a shift in our business, and it's gonna take a little bit of Q2 and Q3 for us to work through that. But I do believe over time, there's additional labor benefit in regards to efficiency, and that should also allow us to drive top-line sales by being more efficient and more effective.

Alex Slagle (Equity Analyst)

Thanks. Good luck.

Greg Levin (CEO and President)

Thank you.

Tom Houdek (CFO)

Thanks, Alex.

Operator (participant)

The next question is from Andrew Wolf with Loop Capital Markets. Please go ahead.

Andrew Wolf (Managing Director)

Great, thanks. You know, I wanted to ask about your, your goal of getting to the 16% exit, you know, restaurant-level cash flow, which was 2019. You know, I just wanted to kind of point out sort of the obvious, that, like, the five-year period before that, it was-- you know, that margin was really more like 17%-19%. So I just kinda wanna ask, is there any structural reason post-COVID, for, you know, 17% to 19% to be or not be in play? I mean, I particularly think about, you know, indoor dining, you know, in-restaurant dining versus off-prem as maybe a structural reason. The old margins may not be attainable, if everything else, you know, wasn't equal. Obviously, you're doing a lot on the cost side.

I guess maybe you could just help us think about, you know, a longer-term goal on the margin side from the restaurant level.

Greg Levin (CEO and President)

Yeah. And Andrew, great question. Well, where I would say we are today, and I think businesses in general in the restaurant space, maybe, limited service in California might have a little bit different model right now. But where we are today is, the additional $1 of sales is gonna flow through somewhere in that 50% range or so, and we used to always talk about that on the call. So when we think about driving and the reason for that today is we've gotten through all the inflationary pressures that came through coming out of COVID, from 2021 into 2022. So we've kind of reset that basis there, and now we're dealing with, for the most part, more normalized inflation.

So with more normalized inflation, as we can drive that incremental sales, we should be able to get that incremental dollar, and that incremental dollar should continue to move the margins up. Our first step is getting back to where we were in 2019, and then from there, it's continuing to drive sales and getting our margins above that. The one area that is different today, it's about 130 basis points or so, maybe, you know, give or take a little bit more in our P&L, is third-party delivery charges. So when you look at our numbers in general, they're gonna be 130 basis points different than maybe where they were in 2017 and 2018 and 2019. But other than that, we should be able to drive higher sales from that and ultimately end up with greater dollars per restaurant week.

That's one of the things that we've got our eye on, is how do we get to our dollars per restaurant week being the same as where they were in 2018 or 2019? And that's what we take to the bank, but obviously, we want both of them. And where we are because of the initiatives that we've put in place, and the things we've done, it's allowed us to get back to a very leverageable business, which is, I think, what we saw in the Q1, and even Tom mentioned it. It would have been interesting, frankly, to see how good our margins would have been with a normal Q1 or with a normal January and even into the first week of February, because January is a big month for us. It's a really big month for us.

Same with February in regards to President's Day weekend and Valentine's Day. So the 15%, a margin that we're, you know, happy with, we're not satisfied. I think we left them on the table because of weather-related, and I think as we go into Q2, I think there's opportunities to continue to expand that.

Andrew Wolf (Managing Director)

Got it. Thank you. I think I'll get back in the queue. Appreciate it.

Tom Houdek (CFO)

Thank you, Andrew.

Operator (participant)

The next question is from Jeffrey Bernstein with Barclays. Please go ahead.

Pratik Nawani (VP)

Hi, this is Pratik on for Jeff. Appreciate you taking the question. Just a bigger picture question on consumer behavior. We've heard a lot of companies report over the past week, you know, noting caution on spending, and there's a lot of check management going on, particularly with lower-income consumers. Just wanted to see how you would respond in this environment. Obviously, you're seeing the promotional environment picking up. A notable competitor of yours just added a premium burger to their value platform. So just how do you kind of maintain your brand equity while also acknowledging that, you know, maybe the consumers are getting a little bit more cautious, and how do you kind of maintain your value proposition? Thanks.

Greg Levin (CEO and President)

Yeah. So just, when we look through our segmentation of our guests and look at our data, it does tend to be that the lower-income consumer seems to be doing a little bit more check management maybe than the other consumers. And we look at that with around consumers around $50,000 of spend or less, seems to be, again, a little bit different in their average check and how it's acting versus some of our other consumers. So there's a couple of ways that we're going about it, and I think you're seeing all different companies do it differently. One is, as Tom mentioned, we are not adding as much menu pricing as we've done before.... We think we are in a position today that we can improve traffic and drive margins.

I think the health of traffic is a greater importance today versus getting back to where margins were even in 17, 18 or 19. I think because of that, we can drive people in and leverage that part of our business. At the same time, in regards to our marketing and driving awareness, we do have our what I would call, you know, good price point out there, which is the affordability side of things, whether it's yesterday, Wednesday, is our loaded burger day. So loaded burgers are $11 or $12, depending on where you are in the U.S., with unlimited fries. So it's a great deal that comes in. We have half-off large pizza Mondays. We also have our lunch specials that start at $12.

So we have areas of our menu that continue to have great price affordability, which, you know, we call our Daily Brewhouse Special. And then we'll lean into, at times, different promotional areas. We haven't leaned into it too heavily, but they might be, you know, things such as a $10-off $40. We've done that before. We're not looking to get hugely on the deep discount to reach out to them. The other side of this, as we continue to work with the lower value guests as well, is we drove a lot of incremental guests into our loyalty program in Q1. And that loyalty program, that database, I think, it increased by over 10% or so in the quarter, or 10% increase. That allows us to reach out to them with special with special offers.

And then one of the things that we talked about at our Investor Day was our three-year culinary strategy. And as part of that three-year culinary strategy, not only did we want to have the wow upgrades, which are things like our surf and turf, but we also want to lean into a value portion of it, which I believe is around 20% to 30%. And that includes right now, certain appetizers that we put on that are under $10, as well as looking at a couple other newer menu items that are in the value category. So we're going to play into that, but we're going to play into it that works for BJ's and differentiates BJ's and what we're known for. We're not looking to do, you know, a buy one, get one, or anything else from that perspective.

Again, kind of tell people about the great price points we have at BJ's, and then also talk about the fact that we are experiential dining. When guests are looking for a, what we would call maybe a better dining experience, where they've got that hour of time, we want to give them a higher quality dining experience for the right price point that is affordable for everyone.

Pratik Nawani (VP)

Very useful color. Thank you so much.

Greg Levin (CEO and President)

My pleasure.

Operator (participant)

The next question is from Aisling Grueninger with Piper Sandler. Please go ahead.

Aisling Grueninger (Equity Research Associate and AVP)

Hey, guys, congrats on the results. My question is on the late night day part. I know on the last earnings call, you mentioned that the late night day part was your best performing with comp sales around mid-single digits for the quarter. I was just wondering if you could update us on this day part, and also wondering if you expect with the remodels in the new bar area, if there's room for this day part to continue to grow. Thanks.

Tom Houdek (CFO)

Sure. Thanks, Aisling, for the question. Yeah, this is, you know, if we look across the board, both, you know, on premise especially, but even off premise, just a great performing day part for us. We did expand hours in the middle of last year, and it's continuing to pick up steam. So yeah, positive comp sales for the quarter, even positive traffic for the quarter in Q1, even with the weather in January. So yeah, it's... You know, if you think of what's core to BJ's, it really is the bar business and having the great bar statement as we're touching in all of these remodels. And as we go through our new version of the prototype, it'll have the 130-inch TV.

So this is a core attribute of BJ's, and great to see both even on and off premise. It's a business that is really healthy for us right now.

Greg Levin (CEO and President)

I think, to add to that, I think this is really important, is you have to lean into areas that you have authority, in your business. And that, that late night and that bar business, that's something that's very unique and differentiated to BJ's, that a lot of other concepts can't necessarily talk about, especially in the casual dining space. So as we continue to think about our, our awareness amplification and what we do differently, those are areas that we're going to continue to lean into to drive that part of our business, because, again, it's a differentiating factor. It's one of the reasons that guests come to use us.

Aisling Grueninger (Equity Research Associate and AVP)

Great. Thank you. My other question is just where marketing came in as a % of sales, in the quarter.

Tom Houdek (CFO)

It was 1.9, 1.8, 1.7%, Aisling.

Aisling Grueninger (Equity Research Associate and AVP)

Great. Thank you. I'll pass it back.

Operator (participant)

The next question is from Nick Setyan with Wedbush Securities. Please go ahead.

Nick Setyan (Equity Research Analyst and Managing Director)

Thanks, and congrats on the, on the margin trajectory here. You know, first question is, is really on the other OpEx. You know, that had been an expense line item that had been pretty sticky, and it seems like even with the upped, you know, marketing expense, I think you guys saw, like, 60 basis points or 70 basis points of improvement year-over-year ex marketing, on that line. So, you know, what, what exactly are you guys focused on in that line? And, is there more that can be done on that line to get to see even more leverage going forward? Because your, you know, Q2 guidance, even if you assume less leverage on labor, you know, it would have...

I mean, we would have to assume a lot less leverage on other OpEx to get to that, you know, mid-fifteenish type of restaurant level cash flow.

Tom Houdek (CFO)

... Sure. Yeah, the O&O line, you're right. I mean, in terms of our, especially our productivity initiative, this is one where we've identified ways to save, but they've taken some more time to implement. So we're starting to see some of those come through in Q1. We called out the changes that we had in our R&M planning for the year, and that's both on OpEx as well as CapEx. We've also. We've made some changes that, you know, some outside services that we're now completing internally, that it's. We can do it for cheaper, and it's a higher quality. But even coming into later in the year, we've got a new disposable distributor that is going to give us product at a lower cost.

That'll be, you know, a nice savings then in the second half. So we're continuing to find ways to just be more efficient in the core O&O line. And some of this has been stickier, that has been sitting higher. But yeah, this is, you know, when I think of where we're gonna find some good cost savings this year, I want to find even more savings on this line. Going into Q2, we do have extra marketing—you know, some extra marketing spend happening then. So our 1.7 that we just mentioned is gonna be closer to two. So we will see a little uptick in the total O&O line because of a little extra marketing spend. We are seeing a little extra inflation as well on commodities versus cost of sales.

So there, there's a few things that are also baked into the forecast for where margins are gonna be. But yeah, there's, you know, some nice tailwinds as well.

Nick Setyan (Equity Research Analyst and Managing Director)

Fair enough. The other question I wanted to ask is, you know, not so much the value equation, 'cause it does seem like you guys are still a relative value to your peer set in terms of where your average check is. But what can you do to highlight that, that sort of favorable value gap a little bit more?

Greg Levin (CEO and President)

Yeah, Nick, that's something that we continue to work on, and that gets down to really driving the awareness around that price point affordability. So, as we lean into that, we've leaned more into our Daily Brewhouse Specials. As I mentioned earlier, talking about whether it's the Loaded Burger Wednesdays, it's the Slow Roast Thursdays that come about, the Half Off Pizza, those have been big areas for us. We've continued to also, as we work through our new menu and create new menu items that have a little bit better price points, let's call it, starting price points, but allow our guests to trade up if they want. That comes in, and it's going, it's a part of the really the media side of it.

The other is, as we've rolled out our newer menu, we, this year, went back to what we used to do pre-COVID, but have that spiral menu. It allows us to actually change out pages, so we are a little bit more flexible and able to push some of the value there. And in a couple of markets, while they're in test, I won't go into specifics, we do have a more value menu in certain specific markets that we continue to analyze the test, and depending on how it comes through for us, we may see us expand that.

Nick Setyan (Equity Research Analyst and Managing Director)

Okay, and then just a Molly question. In Q2, what is pricing going to be? Menu pricing in Q2, all in?

Tom Houdek (CFO)

Pricing will be in the 3% area.

Nick Setyan (Equity Research Analyst and Managing Director)

Got it. Thank you.

Operator (participant)

The next question is from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia (Partner and Head of Consumer Equity Research)

Hi, good afternoon. I was hoping, you could quantify kind of more where traffic has improved to in the month of April?

Greg Levin (CEO and President)

Negative, low single digits, right?

Tom Houdek (CFO)

That's right. Yeah, so far, yeah, so we're through April now, so it's in the down about 3% area.

Sharon Zackfia (Partner and Head of Consumer Equity Research)

Perfect. And then, Greg, I apologize if I, I missed this, my cell phone cut out, but it sounds like you're making some incremental investments in hospitality. It sounded like maybe those are in specific regions. Can you talk about what you're seeing that's causing you to, to make those investments? And has there been any kind of waffling, I guess, in guest satisfaction that's leading you to, to think about investing more there?

Greg Levin (CEO and President)

Yeah. By the way, I just want to think about your first part of the question. Our dine-in traffic is actually less than -3%. It's kind of in the twos, just from a negative standpoint. So we're getting a little bit of drag from the off-premise. And we did talk about, you know, we're spending money wisely in off-premise and looking at other ways to drive off-premise overall. But when we look at the health of the business overall, we want to drive that dining room traffic. That dining room traffic delivers an affinity for the brand, and that then drives off-premise. So just wanted to get back to that aspect of it.

In regards to your other question from a labor standpoint, one of the things that we've been really looking at in our business is pace and the throughput in our restaurants and how we can be faster. BJ's has never been a fast restaurant. People like to come, and spend their time there and enjoy their time at BJ's. That's why we're more experiential. From a dining perspective, we're not necessarily something that's complementary to something else, meaning we go to BJ's and a movie, we are the event of the evening. But at the same time, we're looking at areas that we control, whether it's how quickly we get somebody seated, how quickly we get an order into the guest, how quickly we cook, how quickly it gets run out, and so forth.

As we looked at that, Chris Pinsak, our Chief Restaurant Operations Officer, and his team really started looking at some of the pinch points in regards to how quickly do we get to a table? To get that order into the kitchen, because if it's into the kitchen quicker, it cooks quicker. And we started looking at that ratio at times between servers and food runners, as well as how do we wanna think about an expediter in regards to a quality, what we call a quality fast position. And we're making some tweaks to that. The, the net-net of that is it should not add any real labor dollars to our business. It's more of a shift from servers, from food runners, and into more of an expediter type role that we didn't have, that we used to have maybe 15 years ago.

and we're doing that in more of the high volume restaurants first, to see how that how that works for us and how that drives, improved pace and throughput. And then as we work through that, we'll look at we'll look at that and determine the right cadence for the rest of the, the restaurants.

Sharon Zackfia (Partner and Head of Consumer Equity Research)

Thanks for that. Just one last question. It sounds like you're seeing a little bit of commodity inflation tick up. Do you still expect flat to low single digit for the full year, or has there been a change to that?

Tom Houdek (CFO)

No, that's still in line with our expectations. It's you know, it's looking like the low single digits, but but yeah, we you know, still a lot of year in front of us. But you know, we had a you know, really good Q1 in terms of where we were expecting commodities to come in. But some of the produce recently is higher, some of the meat. So it's more or less in line with the plan as it started. We had a little bit better Q1. Now we're seeing some of it pick back up a little bit. So yeah, we're still right in line with the original guidance.

Sharon Zackfia (Partner and Head of Consumer Equity Research)

Okay, thank you.

Tom Houdek (CFO)

Thank you.

Operator (participant)

Our last question today comes from Todd Brooks with The Benchmark Company. Please go ahead.

Todd Brooks (Senior Analyst and Managing Director)

Hey, thanks for squeezing me in. Just wondering, Tom, within the guidance for slightly negative same store sales in the Q2, what are the assumptions that you guys are building in for the strength of celebration season here, Mother's Day, graduation, Father's Day? Thoughts on how those should perform year-over-year, given the macro background?

Tom Houdek (CFO)

Yeah, everything. When we look back to the recent celebrations, the Valentine's Days, you know, when we were expecting people to come out, they have come out. So I am expecting, and I, the focus internally is how do we make sure, yes, Gracious Hospitality is a focus, but also pace, so we can get these tables sat and people fed, and when they wanna leave, they can leave. And so we're ready to seat the next group. So yeah, we're expecting these to be big weekends for us. And, you know, we're putting all the operational pieces in place to make sure we can, everything we can control is being controlled and driving as much sales as possible.

Todd Brooks (Senior Analyst and Managing Director)

Are those weekends that you can actually grow year over year, or it's more hold to hell because they were such high volume weekends last year?

Greg Levin (CEO and President)

Our goal is always to grow and have more consumers come into our restaurants. As I mentioned earlier, Chris Pinsak, our Chief Restaurant Operations Officer, got through with the rest of his ops team and looked at ways to make sure we have the most flexible floor plans in place, how we increase reservations for those those big weekends, and reach out not only for Mother's Day and Father's Day, but also all the graduations that happen at that time during that season there. And we believe that by adjusting our floor plan and some of the changes we're making in the labor staffing that we're gonna do in some of our our bigger restaurants, that we have the ability to get them into our restaurants, sat faster, food into their tables faster, and that provides additional capacity.

One of the things that we've seen in this business coming really out of COVID is just restaurants seem to be busier at the front desk. And then as you look in the restaurants, they're just not operating as fast as they are. So I wouldn't necessarily call entirely false waits per se. It's more about how are we more efficient when people come into the front doors of our restaurants, so we get them sat sooner. And that's one of our big initiatives this year, and that initiative will really prove itself out come Father's Day, Mother's Day, and these graduation time frames.

Todd Brooks (Senior Analyst and Managing Director)

That's great. And then, Greg, you talked about without the impact of January, we probably really would've been even more surprised by the restaurant-level margins than where we are now. And I know if we have a normal celebration season, that typically that's a big sequential lift that we tend to see in restaurant-level margins, kind of Q2 versus Q1. So Tom, I think you talked about less pricing, a little bit more commodity inflation, but just trying to get a sense of, is there a how high is up type of way that we should think beyond the 15.5 guidance if things do fall as expected in Q2?

Greg Levin (CEO and President)

You know, Todd, it's interesting. Being in this business as long as I have been, people used to talk about this business around Q2 and Q4. If you go back historically and look at this business, it's switched to a Q1 and Q2 business. It just, you know, at the first part of January, it's longer school breaks. You go into spring break in March, which is still in Q1. As I mentioned, Valentine's Day, President's Day, other, you know, long weekends. When you go back and you can look at BJ's margins over the time, the difference between Q1 margins and Q2 margins, they do bump up from time to time, but they're not like 100 or 200 basis points or 300 basis points more. You'll see anywheres from 30 to 100....

play in there. So, you know, I think as we think about where we've looked at our business, where we're trending, you know, I think the mid-15s is a solid, you know, improvement in where we are today and continues to move us forward. If sales come in significantly better, as I said earlier, the ability to leverage in this business, I think, is very strong.

Todd Brooks (Senior Analyst and Managing Director)

Okay. If I could squeeze one more in. Exciting to hear that you got the build cost down to $6 million in the new prototype. Just wondering what changed to get the build cost down that much? Is it front of house changes, back of house changes? I know it was a little bit more maybe, quote, unquote, "simple construction," 90-degree angles versus curves and angles and things like that, but that's a big drop from where you guys were running with the recent set of builds, and just wondering how you got there. Thanks.

Greg Levin (CEO and President)

Yeah. A big portion of that, Todd, you were with us at our Investor Day, and you saw our Framingham restaurant and some of our newer restaurants. They have that island bar. That island bar takes up more square footage versus our more traditional restaurants that have what we call the classic bar statement against the wall, where we could put that 130-inch TV in. And that helped achieve a big amount of savings there. It then allows us to run that much more efficiently because you've got the kitchen right behind the bar, so it's easier for team members to serve the people in the bar area. They're not as driving as many steps.

Then losing that island bar, you don't have to staff it with two to three bartenders at different times because you have people on different sides of the bar. So that's where you get some of that operating efficiency. So that's a significant portion of it. There's also other things that we looked at within how we set up the kitchen, as you just saw it, you know, undulations or right angles versus curved angles.

Todd Brooks (Senior Analyst and Managing Director)

Okay, great. Thanks, Greg.

Greg Levin (CEO and President)

My pleasure. Thank you.

Operator (participant)

This concludes our question and answer session, and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.