BJ's Restaurants - Q2 2024

Transcript

Operator (participant)

Good day and welcome to the BJ's Restaurants, Inc., second quarter 2024 Earnings release Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note that 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 second quarter investor call and webcast. After the market closed today, we released our financial results for our fiscal 2024 second quarter. 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 those projected 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 from 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 Levin. Greg.

Greg Levin (CEO and President)

Thank you, Rana. BJ's delivered another quarter of restaurant-level margin growth and adjusted EBITDA growth of 13% over the same period last year. These solid results, again, highlight the benefits of the strategies we shared at our Investor Day in November. Our approach focuses on driving sales through our Familiar Made Brewhouse Fabulous culinary initiative, increasing and enhancing our brand awareness, improving our operational excellence through our people initiative centered on our Gracious Hospitality, and enhancing our ambiance through our remodel initiative. Additionally, our holistic top-line approach to driving sales is complemented with our margin expansion initiative through productivity and cost savings enhancements. These strategies are working and continue to establish a solid foundation for financial and restaurant growth and enhancement of shareholder value. We finished the quarter with total sales of $349.9 million, while comp sales were slightly negative at 0.6%.

However, throughout the quarter, we saw month-over-month improvement in comp sales driven by guest affinity for the BJ's concept and choosing BJ's to celebrate important moments like Mother's Day, Father's Day, and graduations. Reflecting this strong guest affinity to the BJ's concept, 107 restaurants broke either daily or weekly sales records in Q2. Furthermore, our restaurant margins continued to expand and rose to 15.5%, representing an increase of 100 basis points from the prior year. Our restaurant-level cash flow per operating week was approximately $19,200, just slightly behind fiscal 2019's restaurant-level cash flow per week of $19,300. So while percentage margins were still behind 2019's levels, we closed the gap on the dollars per restaurant week. Adjusted EBITDA in the quarter rose to $36.1 million and increased to $4.3 million, or 13% higher than prior year.

Our team did an amazing job focusing on driving throughput in our restaurants this past quarter as we rolled out the second phase of our Gracious Hospitality people initiative. If you recall, the first part of this initiative focused on new server scripting and was launched last year. In April, we initiated our enhanced service model, which balances the number of tables per server, food runners, and quality fast expediter positions in our restaurants. These changes allow servers to get to our guests sooner so we can get orders into the kitchen and the bar faster. It also frees up our managers so that they have more time to be in the dining room to ensure we are delivering the gold standard level of operational excellence for our guests. And it elevates table turnover, which in essence expands the capacity of our existing platform.

The goals of these changes are to improve our pace and throughput in our restaurants and further improve our already high standards of service and hospitality. Based on our consumer research, we know that pace and throughput is another opportunity for us that will drive top-line sales. In addition to enhancing our service model, we are also evaluating and testing other technological enhancements that will help us further improve throughput in our restaurants. These include changes to the way our Kitchen Display System informs our team when to fire or begin cooking an item, to changes to our server tablets that can inform our team members where the guest is during their dining experience with BJ's. I want to thank our team members for diligently implementing these service model changes.

It was a large undertaking, and our teams executed it flawlessly, knowing that these changes deliver a better guest experience, which ultimately continues to drive top-line sales. Our next Gracious Hospitality phase will be new hourly training for all restaurants, and that is expected to roll out later in Q3 and in Q4. This will include additional side-by-side training for all new hourly team members. Overall, we continue to expect these initiatives to take the better part of Q3 and Q4 of this year and have a slight impact on training labor for these quarters. These investments in our team are critical elements to driving top-line sales since every additional sales dollar leverages the fixed elements of our restaurant's cost structure.

As we've said on past occasions, the best way for us to improve our restaurant-level cash flow is by driving sales, and we have a proven playbook and strategies that are helping us meet this goal. We also continue to execute against our remodel initiative that is similarly driving improved sales and traffic. We have now completed 19 remodels year to date, and we expect to do approximately 5 more this year. By the end of this year, we will have remodeled approximately 70 restaurants since we began this initiative. We will finish fiscal 2024 with approximately half of our restaurants either recently remodeled or one of our newer prototypes. With the success of our remodel initiatives, we have been effectively and prudently deploying capital.

To date, we have opened one new restaurant in Brookfield, Wisconsin, and we expect to open our next two restaurants in August and September of this year. Both new restaurants will feature our new 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. This new prototype also provides greater operating efficiencies and higher and faster returns while incorporating our learnings from our remodel initiative, which includes lighter colors and a more contemporary bar featuring the 130-inch television as the focal point. Our long-term model for our business continues to be to drive top-line sales in this 8%-10% range through a combination of 5%+ unit growth and comparable restaurant sales in the low- to mid-single digits.

However, as we've communicated previously, 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 we will translate into enhanced shareholder value over the medium and longer term. Now, let me turn it over to Tom to provide a more detailed update for the quarter and the 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 second quarter, we generated sales of $350 million, which was slightly higher than last year. On a comparable restaurant basis, Q2 sales decreased by 0.6%. From a weekly sales perspective, we averaged more than 124,000 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 15.5% in Q2, which was 100 basis points better than a year ago, demonstrating again the benefits of our ongoing initiatives to drive efficiencies and the solid foundation we have built for continued growth.

Adjusted EBITDA was $36.1 million and 10.3% of sales in our second quarter. Q2 EBITDA grew by 13% year-over-year and beat the prior year by more than $4 million, with a margin that was 120 basis points higher. We reported net income of $17.2 million and diluted net income per share of $0.72 on a GAAP basis for the quarter, which were each up more than 40% from a year ago. As Greg mentioned, our comparable restaurant sales improved sequentially through the quarter and finished with a modestly positive comp in June. During the quarter, we set a new weekly sales average record at more than 141,000 across our system in the week that included Mother's Day. Also, we mentioned last quarter, we have been scaling back the degree of menu pricing compared to last year.

In May, we only took a small pricing round of approximately 40 basis points, which was more than 200 basis points lower than our Q2 2023 pricing round, leading to a comp headwind in the quarter as we lapped last year's elevated pricing round. The foundation we are building is allowing us to take a more balanced pricing approach to maintaining our traffic driving value with adding appropriate menu pricing to deliver profit dollar growth. Our check growth moderated to the mid 2% area in Q2 compared with the mid 4% check growth in Q1. This was driven by our carried menu pricing in the mid 3% area in Q2, down from the mid 5% area in Q1.

Moving to expenses, our cost of sales was 25.7% in the quarter, which was 20 basis points favorable compared to a year ago and 50 basis points unfavorable compared to the prior quarter. Food cost increased by more than 2% quarter-over-quarter, driven by inflation on key items such as bone-in chicken wings and avocados. Labor and benefits expenses were 36.1% of sales in the quarter, which was 10 basis points favorable compared to the second quarter of last year. We achieved these gains while introducing a new service model to provide guests with an even better restaurant experience, as Greg just outlined. This rollout added one-time costs related to the training and extra scheduled labor, which impacted margins by approximately 20 basis points in the quarter.

Occupancy and operating expenses were 22.7% of sales in the quarter, which was 70 basis points favorable compared to the second quarter of last year. We continue to achieve strong efficiency gains over the prior year from our cost savings initiative and expect further improvements in the second half. G&A was $20.6 million in the second quarter, in line with our expectations. Turning to the balance sheet, we ended the second quarter with net debt of $47.3 million, comprised of a debt balance of $63.5 million, less cash and equivalents of $16.2 million. During the quarter, we repurchased and retired approximately 255,000 shares of common stock at a cost of $8.8 million. We currently have approximately $52 million available under our share repurchase program. Moving to more recent trends, comparable restaurant sales started the quarter modestly positive.

Our sales-building initiatives, including recent promotions, have been successful at driving incremental traffic, as illustrated by our traffic performance far exceeding the Black Box Casual Dining Index in early Q3. Dollar profit growth is our top success criteria for any promotion. We are very encouraged by the incremental profit flow-through we have been able to generate with recent promotions, including our Pizookie Pass. Looking ahead and assuming recent trends continue, we expect Q3 comp sales in the 1%-2% range, taking into account recent check-in traffic trends and anticipating a regular seasonal pattern. As a reminder, our third quarter tends to be our lowest sales quarter of the year due to seasonality. Factoring in recent trends and expectations for Q3 comp sales, we expect restaurant-level cash flow margin to be in the mid-12% area as we continue to expand our margins over the prior year.

This guidance incorporates a higher level of marketing investment to build additional brand awareness and drive traffic to our restaurants, as we noted in last year's Investor Day presentation. As a percentage of sales, marketing costs will be approximately 50-70 basis points higher than Q3 of 2023. Also, food cost inflation has stepped up on certain items recently, which is reflected in our third quarter guidance. We expect G&A to remain in the $20 million area for Q3. G&A continues to track toward the higher end of our original full-year guidance range of $82 million-$84 million and to the lower end of the guidance range when removing approximately $2 million of extraordinary G&A expenses from Q1, which were previously discussed.

Much like Q1 and Q2, as well as our guidance for Q3, we expect margins to continue to expand in Q4 year-over-year as we grow sales through the strategic initiatives we've outlined and make additional progress on our margin improvement initiatives. In terms of cost savings, our new disposables distributor will be fully rolled out by the fourth quarter. We are also testing a tool for our restaurant operators that uses our AI-based sales forecast at each restaurant and generates a tailored labor schedule down to the hour and day based on expected demand and other criteria that we set. The early results are encouraging, and we expect to expand the usage of the tool by the fourth quarter and drive additional labor efficiencies. Our goal remains to close the gap to 2019 margins by year-end.

In conclusion, with significant cash flow from operations, expanding margins, and a healthy balance sheet, BJ's has the financial flexibility to execute multiple initiatives to enhance shareholder value. Specifically, we are focused on delivering value to shareholders through sales and productivity initiatives and through our disciplined approach to capital allocation, including new restaurant openings and restaurant remodels, which both continue to generate strong economic returns, as well as our share repurchase activity. 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 positions us well to continue building on our successes in enhancing shareholder value. Thank you for your time today, and we'll now open the call to your questions. Operator?

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily for the first question. And our first question today will come from Alex Slagle with Jefferies. Please go ahead.

Alexander Slagle (Senior VP and Equity Research Analyst)

All right. Hey, guys. Thanks. I wanted to see if you could talk more about what you experienced through the May and June holidays, both in terms of consumer demand and the sturdiness of that special occasion dining piece, and then also just your experience driving throughput. I mean, I guess it was early stages as you were rolling out the elements of the new service model. Just any early learnings from what you saw there during those Mother's Day, Father's Day graduation periods?

Greg Levin (CEO and President)

Yeah. Good question there, Alex. I think, first off, as we've kind of mentioned in the call, we saw improving trends throughout the quarter coming out of April in the May and June. I would tend to say that around the holidays specifically, there was definitely demand within our restaurants, driving traffic and average check as consumers came out to celebrate at BJ's. So Mother's Day, Father's Day graduation weekends were strong for us. We mentioned setting those records, and as Tom mentioned as well, we did over 140,000. I think it was 141,000 weekly sales average. So when there is, and we said this before, when there is a reason to dine out for a celebratory event, consumers come out. They want to go out and celebrate. There's emotional attachment to coming to sit down restaurants.

I think BJ's, I think I know BJ's provides that for many, many consumers, and that's why we saw it in our business there. In regards to your second part of your question, we're at the very beginning. We had those inefficiencies that we had to go through. You think you understand our restaurants and the size of our restaurants. To put more servers on the floor required more hiring that we had to do. And in one sense, it ends up with sometimes more people in the kitchen running and grabbing food and working those transitions out. What we do know is when we get to our guests sooner and we get that first order in sooner, our Net Promoter Scores go up. They have a better dining experience with us. And that's one of the main reasons for having more servers on there.

We know if we get their food in faster, obviously the entire experience should be faster. I would tend to say on this specific initiative, we are probably in the second or maybe the top of the third inning. There's still a lot more for us to do. A lot of it comes down to the teams getting even more and more mature in this process and getting their sea legs under them. And then we continue to now monitor it in regards to, as we call, fire-first reports and other things to see how we're doing on that productivity. I think myself and our operations team are excited about this because it really unlocks the throughput in our restaurants and makes us more productive. It gets us thinking about how we can turn the tables at a speed that makes sense for our team members and for our guests.

We're going to continue down that path.

Alexander Slagle (Senior VP and Equity Research Analyst)

Great. Just a question on the 3Q, same sort of sales outlook and maybe the quarter to date. Are there any dynamics with the calendar shift, like 4th of July holiday moving around and then potential dynamics that play with the Olympics and elections and things like that that you're looking out for?

Greg Levin (CEO and President)

Yeah. Look, I'll give you my perspective on this. Where we are right now, as Tom mentioned, the 1%-2% seems to be our reasonable guidance. The calendar itself is not a great calendar in the sense that you got a July 4th moves to a Friday, so it moves a little bit into the weekend. We had the hurricanes kind of in our numbers there. Obviously, as you go through the quarter, it becomes less impactful. At the same time, and we said this before, political conventions are not great for dining out. A certain amount of consumers always want to see certain people speak at conventions. So those become challenging times during the middle of the week.

The Olympics, usually opening and closing ceremonies, are more challenging days overall for us, as again, I think people are really interested in seeing what the fashion is of the different countries walking into opening ceremonies and what the fashion is on the closing. But I think you take those out and look at the underlying consumer. It's pretty consistent with what we saw in Q1. The lower-end consumer year-over-year, kind of at that 50,000 range, has kind of reduced their purchasing. We continue to see that aspect of it. But looking to Q2 versus Q1 as we go on even to Q3, we're not seeing any real change in the consumer. We just have to be wary of the calendar.

Alexander Slagle (Senior VP and Equity Research Analyst)

Got it. Thank you. Good luck.

Greg Levin (CEO and President)

Thank you.

Operator (participant)

And our next question will come from Jeffrey Bernstein with Barclays. Please go ahead.

Jeffrey Bernstein (Equity Research Analyst)

Great. Thank you very much. 2 questions. The first one, just following up from a comp perspective, because it does look like, I guess you're saying in July you were modestly positive and you're assuming a 1-2 for the full quarter, so seemingly a little bit of an uptick. I'm just wondering if you could talk about maybe the industry backdrop behind that, because it does seem like peers are being more aggressive with value offers, and it does seem like broader industry trends are slowing. So just wondering how you think about the outlook for the rest of the quarter. And within that, just California in particular, we've now heard from a variety of restaurants that they've actually seen a pretty significant pullback in California, maybe consumer being more cautious after seeing all these price increases that maybe some of the fast food chains have been taking.

I'm wondering if you've seen any change in your California performance in recent months relative to the rest of the country. Then I had one follow-up.

Greg Levin (CEO and President)

Yeah, Jeff, there's a lot there. So I'll take some of that. I think Tom can probably provide a little bit more detail, maybe how we're thinking about comp sales through the quarter as well. When you take a step back on California, I think California did take a step back in April and is slowly moving itself back. There's two things that I think played in April for the consumer, and I think you mentioned one of them. And that is the California minimum wage put sticker shock across all consumers. Whether you're in casual dining or QSR fast casual, the fact of the matter is there are different dining occasions, and if you went to one place and said, "Wow, that seemed expensive," maybe you pull back from another. And I think that initially played into consumers, and they had to adjust to it.

I also believe, and this is something that doesn't get talked about as much, California, and I find this weird being a Californian, by the way, California in 2023 had what they call historic rains, even though we had felt like the same rains in 2024. And as a result, tax returns were delayed until September of 2023. So this year, everybody in California had to file their taxes in April, where they didn't last year. That on top of maybe the minimum increase could have impacted California consumers early on. And a little bit of that goes into our thinking about how comp sales will play out through this quarter. Because in California, most people have now already paid their taxes, and September might not be a drag as it would have been a year ago. So that comes into our overall cadence in our business.

And then we continue to monitor the landscape in the value. I think the issue with value that we face and becomes, I think, more challenging in regards to driving comp sales is not necessarily value per se, but it's the amount of media and marketing dollars that people are spending to tell that message. So you're fighting for your voice to be heard out there with the consumers. It's one of the reasons, as we look at this quarter, that we're going to be increasing that marketing spend just versus quarter-over-quarter from a year ago. We need to be heard from the consumer standpoint to make sure they continue to come to our restaurants so we can leverage that additional sales. It was part of actually our plan all along.

It was to step up in Q3, but it's probably worth about 20-30 basis points more than what we were thinking before as we enter this quarter. Tom, I don't know if you have anything to add?

Tom Houdek (CFO)

Yeah, Jeff, you asked specifically around California, and we're not seeing any different trends. We've been stronger in California, so we're lapping that. But as we look across the dynamics in our markets, there's nothing noteworthy in California. If we look to Black Box, we're used to outpacing the industry in the home turf. So nothing really reported. And one other thing, Greg mentioned a lot of the moving parts in California. Gas prices have come down a bit too. So when you think of just money, disposable income in the consumer's pockets, I think we're seeing that tailwind coming in here too.

Jeffrey Bernstein (Equity Research Analyst)

Understood. And then my follow-up is just on the unit opening side. I think you mentioned you did 1 this year. So far, you'll do another 2, so that'll get you to 3 for this year. But I know, Greg, you mentioned the long-term algorithm. In the ideal scenario, it would be to get to mid-single-digit unit growth. And with remodels, presumably at, I guess you're saying, half the system will be at the new prototype by the end of the year. So I'm just wondering how you think about 2025. I know you haven't given formal guidance yet, but presumably you have some line of sight into openings for next year. Whether next year is a year of a big uptick from the 3 to get you anywhere close to that kind of 5%, which presumably you'd need 10 or more.

So any thoughts around the unit growth outlook looking into 2025 or when you think you'd get to that kind of 5% level? Thank you.

Greg Levin (CEO and President)

Yeah. Great question. So we continue to build our pipeline. We've said one thing consistently at BJ's. Getting back to 5%, where we want to go, was never going to be a one step forward. Just we want to make sure we do it with quality. So getting to, if you think about it, being 10, 11, 12 restaurants, our goal would be to stair-step that. We'd have to move to 5 and then to 7-8 and kind of move ourselves into that direction to make sure that we're bringing in the right quality in regards to people so that we can execute at that gold standard level that we talk about. So as we continue to build our pipeline, we'll evaluate where we want to go for next year.

We want to make sure that the 2 new prototype restaurants that we're doing right now as well hit their returns. So when we get into really the September, I guess the end of this quarter, in October, we'll have more of our plan put together, and we'll kind of give a broader range from there. That plan then goes to the board for the board approval. So we're kind of working it through that way, but we continue to build that pipeline. But I think for us to get to the 5% growth, it wouldn't have been a 2025 year even to begin with as we want to continue to step it up, especially coming off of our current run rate of 3.

Jeffrey Bernstein (Equity Research Analyst)

Understood. But it seems like you're on the path to at least absolute number to be greater than three next year if you're even heading anywhere towards that, like you said, stair-step.

Greg Levin (CEO and President)

That's right now within our plans. But we continue to evaluate that. We continue to evaluate that against remodels because it comes down to the fact that we've got this ability to use our cash flow in numerous ways. One, remodels, obviously building restaurants and to enhance shareholder value. So ultimately, as remodels come down, as we have mentioned over time, that additional capital then can be funneled into trying to stair-step up restaurant growth with the right quality. Or if we, in the short-term, had to do it more in share repurchases, that's what we would do as well.

Jeffrey Bernstein (Equity Research Analyst)

Thank you very much.

Greg Levin (CEO and President)

You're welcome.

Operator (participant)

Our next question will come from Todd Brooks with the Benchmark Company. Please go ahead.

Todd Brooks (Senior Analyst & Managing Director)

Hey, thanks for taking my questions. Just two quick questions, if I may. One, Tom, you talked about closing the gap to 2019 restaurant-level margin levels by year-end. Can you just elaborate on what you're meaning there? I know Q4 of 2019, I think, was a 16% margin quarter for you. Can you kind of put a framework around this so that we don't get too far over our skis for the magnitude of restaurant-level margin recovery you're looking for in that quarter?

Tom Houdek (CFO)

Sure. And we would give more specific guidance for Q3, but as we look forward into Q4, I mean, there's going to be we need to see what the backdrop is at that point, but we want to, if we look at last year and where we want to grow it to, we definitely want to see year-over-year improvement continue. So is it all the way back up to 16%? We have to see what the backdrop is. We want to keep continuing to close that gap and get as close to that number as we can. So we're not giving a more specific number to guide to at this point.

But given the backdrop, given what we see in both our margin improvement initiatives and what we're able to have line of sight on for margin improvement, as well as the initiatives we have to grow topline, we do still see that path to getting definitely above last year and something closer to where we were in 2019.

Greg Levin (CEO and President)

Yeah. I think, Tom, the big wildcard that we continue to look at is really on the commodity side. Even as we go into this third quarter, commodities are inflating more than we would have expected originally. And that was kind of in our guidance here, as well as the additional marketing that we talked about. Depending on how those commodities play, I think, is the big wildcard there in regards to the difference on the margins in the fourth quarter. But as Tom said, we continue to make improvements on our margins and keep moving them forward.

Todd Brooks (Senior Analyst & Managing Director)

Okay. Great. And my second question, Greg, you were talking about the throughput initiative and kind of second, third inning in the process. Can we talk to maybe where you stand now on table turns at peak periods relative to before you started the initiative? And then when you look to the end of the road after all the work is done with this initiative, just can you frame up a magnitude for us of how much you would look for table turns to be improving from it? Thanks.

Greg Levin (CEO and President)

Yeah. Todd, it's a great question. I actually don't have our table turn information in front of me, especially at the peak periods. What I would tell you is our goal is really not so much on the peak periods, but it's to expand the shoulders so that you know that you go to BJ's and it's not a 1 hour and 5 minute dinner experience when you get there at 8:00 P.M. thinking, "I'm coming home at 9:30 P.M." But that we can reduce that down into kind of somewhere in the 45 minutes, give or take a little bit. We know some of the areas that we have an opportunity on, believe it or not, and I think people understand this. One is pay at the table.

We know in a couple of restaurants are putting down a device, and we know people that use the QR code, they save anywhere from 7-10 minutes on the experience. We know when our servers get to our guests sooner, somewhere in that 4-minute time, we're also saving somewhere in the 3-4 minutes. And then we're also, as I said, looking at our Kitchen Display System and where things are lined up for firing within the kitchen so that all the food comes out at the same time. There's a couple of areas there that are some big unlocks that are actually going to take 1-2-3 minutes off of that. So we're tending to look at that overall cook time and trying to move that down versus purely on the table turns and looking at table turns directly at peak meal periods.

We know some of the changes that we made. We made specifically for Mother's Day and Father's Day because we knew how the guests would come in from the prior there. And as I said, not only were we able to grow average check on those days, which is great, we grew traffic, significant traffic on those days by making a couple of adjustments. And that's what we want to continue to kind of follow through here over the next couple of months before we roll these out.

Todd Brooks (Senior Analyst & Managing Director)

Okay. That's great. Thanks. I'll jump back in queue.

Operator (participant)

Our next question will come from Nick Setyan with Wedbush Securities. Please go ahead.

Nick Setyan (Equity Research Analyst and Managing Director)

Thanks, guys. So just kind of want to walk through Q3 and Q4 menu pricing expectations.

Tom Houdek (CFO)

Sure. So we'll have another round of pricing in late September of about 90 basis points. And that's rolling over something in the 2% area from a year ago. So as we walk through, Q3 will be in the mid or call it low 3% area. And then in Q4, we'll be carrying a kind of mid 2% as the timing works in terms of rolling on and rolling off pricing.

Greg Levin (CEO and President)

Hey, Nick, the other thing, just bigger picture, and we've seen this throughout this year, is the way our shift in our business is happening as well. There's a little bit of a negative mix shift or drag on our total pricing. And the reason for that is we're seeing improved traffic and sales trends at late night, maybe a little bit in the mid-afternoon. And that ends up with a lower average check than what we're seeing at the dinnertime side of things. So when we start to look at that, we've seen a little bit of a kind of 50 basis points or something, even a little bit more impact on average check. And we would expect that to continue this year.

Nick Setyan (Equity Research Analyst and Managing Director)

Got it. For this 40-60 basis points uptick in terms of year-over-year marketing spend, does that continue into Q4 as well? Are we expecting an elevated level of marketing in Q4 versus 2023's Q4?

Tom Houdek (CFO)

It balances out more in Q4. It'll still be a little bit up, but nothing like Q3 year-over-year.

Nick Setyan (Equity Research Analyst and Managing Director)

The COGS inflation commentary, I mean, is that just mainly cheese? What else is going on?

Tom Houdek (CFO)

Right now, the two big ones are bone-in chicken wings and avocados. So those are the two that because, as you know, a lot of our food is fixed for the year or for the quarter. There's certain produce and some of our raw meats float to market. So those are the two that we've seen step up to a degree. We will also be, as we step into Q3, we've got a new meat contract. So if we look year-over-year, we're still seeing some really nice savings in red meat. But we have contracts that we are able to fix that for some periods of time, but we'll see that resetting in a month or so. So we'll see a little tick up there as well.

Nick Setyan (Equity Research Analyst and Managing Director)

Okay. And then I guess in terms of just labor, it sounds like maybe a little bit less leverage than we were expecting going into this quarter. Is that simply just the spending around the labor training investments?

Greg Levin (CEO and President)

Yeah. I mean, Tom mentioned it, 20-30 basis points of labor improvement that was lost in kind of the inefficiencies of the new system. I would tend to tell you the numbers for inefficiency are looking significantly better here in P7, which is July for us from that standpoint. But we want to make sure, again, we're taking care of the guests, driving topline sales. This is the system that we're putting in place. We've never put in place for labor savings. So you never heard us come on the call and say, "We're making X, Y, and Z, and it's going to save X dollars." This is about driving throughput, driving topline sales, continuing to improve on Gracious Hospitality and our gold standard level of operational excellence. And I think if they get their sea legs under them, we'll continue to get that.

As we go into Q3 and Q4, we do now start to lap the smaller menu because if you remember, the smaller menu rolled out in July of a year ago. So some of the benefits that we were getting there with less prep, etc., we lap year-over-year. But generally speaking, we continue to see what I would call improvements in our productivity measures around labor. And we want to make sure, again, we're doing it at the right level that's driving improved guest service and hospitality.

Nick Setyan (Equity Research Analyst and Managing Director)

Thank you very much.

Greg Levin (CEO and President)

You're welcome.

Operator (participant)

Our next question will come from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia (Partner, Head of Consumer Equity Research and Analyst)

Hi, good afternoon. Can you talk about the labor environment? I know in California, you were worried that you might see an uptick in your labor costs, even though you're not directly impacted by the FAST Act. I'm also curious, just kind of in the broader country, are you seeing better quality labor? I know there's increased labor availability, but I'm wondering about the quality of the labor that you're getting.

Tom Houdek (CFO)

Sure. I'll take that one, Sharon. And yeah, we mentioned this last quarter. We didn't mention it this quarter, so I can bring it up now. We continue to measure our California labor to see our retention rates to make sure with the California FAST Act, where minimum wage stepped up, and other types of restaurant companies to see if we've seen any change in either our turnover rates or wages, anything like that. And happy to report, still no. As we track it, looking year-over-year and back to even 2019 levels, both California and the rest of the system are still in a better place than we were in 2019, as well as last year. And in terms of wage growth, we did talk about the food cost inflation.

Didn't mention on the hourly side, but we're still sitting in kind of that 3%-4% range, and that's consistent with Q1. So we saw very little wage inflation from Q1 into Q2. So all signs pointing to this has worked for us as we've given some increased wages to some certain elements of our restaurant, but it's balanced out, and we have really great retention rates. To your point on quality, the longer team members are with us, the better execution we see, and that's the case. So we have less reasons to be hiring all the time. But yeah, I think the pool out there is stronger, but we're able to retain our team members more. So it is, I would say, as good of a labor hiring environment as we've seen in the recent past.

Sharon Zackfia (Partner, Head of Consumer Equity Research and Analyst)

And then, Greg, just a question. I know you haven't committed to when you're going to re-accelerate growth, but how far in advance of acceleration do you have to start building the management pipeline?

Greg Levin (CEO and President)

Yeah. Somewhere in the 12-month timeframe, you really have to look at it. The challenge on the pipeline is a little bit different. And Sharon, your perfect example being out there in Illinois or in the Chicago market, that's going to be more challenging to build that manager pipeline. So we want to be more ahead of that in the 12-month timeframe so the team really understands BJ's. Trying to find somebody to move to a new market or satellite market is always more difficult, and we'd love to build that in. Building restaurants in Texas, California, Arizona, some of those markets, the pipeline timeframe's a little bit shorter. So on average, and I know this isn't really an average, you're looking at somewhere in the minimum of 6 months, but more likely you want to be about 12 months out.

Sharon Zackfia (Partner, Head of Consumer Equity Research and Analyst)

Okay. And then last question for me. There was kind of a big jump in other income in the quarter. Was there something unusual in there, or what was kind of this $2 million sequential increase?

Tom Houdek (CFO)

Yeah. There was an out-of-period release that we had of some accrual related to tax credits. So yeah, we'll outline it with more detail in the Q, but that's, yeah, just out-of-period benefit there.

Sharon Zackfia (Partner, Head of Consumer Equity Research and Analyst)

Okay. Thank you.

Greg Levin (CEO and President)

You're welcome.

Operator (participant)

Our next question will come from Jon Tower with Citigroup. Please go ahead.

Speaker 10

Hey, this is Kary Wilcox on for Jon this evening. Just two for me. One, it looks like mix is still running a little bit negative. Is that still really being attributed to just the shift in dayparts with late night coming back, or is there something new coming into that in terms of check management? And then just the Pizookie promo, how should we think about the accounting behind that? Is the kind of giveaway of free Pizookie going to be reflected in that spike in advertising spending, or would it be showing up more as part of a sales cost or sales dynamic? Thanks.

Tom Houdek (CFO)

Sure. So on the check side, so we actually, the dynamic we saw in Q1, pricing to check, we saw that gap shrink into Q2. We are still seeing better comp dynamics in our late-night daypart, and there's about a $10 average check difference, lower in late night. So great that we're growing the traffic, but there is some check headwind to that as it averages in. The other piece is alcohol, where we check it year-over-year as well as back to 2019, and we continue to see some headwind in terms of what we sold last year, but more kind of normalizing back to 2019 levels than anything else. So those are the two main pieces that are the delta between our check growth and the pricing.

And to your second question, the Pizookie promo, so there is a modest amount of sales income we take when the membership is paid for for the month, but then going forward, it is just cost of sales. So the idea is, and we're seeing this, that most, when these are used, they'll come in and they'll spend on whatever they want to eat, plus they get their Pizookie for free. So we'll have the sales for the rest of their meal, then they'll have the cost associated with the Pizookie that gets added to their check. So we'll see the incremental sales off of the whole check that they spend, but then the Pizookie just will flow through as cost of sales.

Greg Levin (CEO and President)

So Kary, to that point, it's a great question. That type of promo drives traffic into our restaurants. And as Tom mentioned, they end up with a free Pizookie on their meal. So it's a lower average check. So when you start to think about that mix, that mix would probably continue to be negative in Q3 like it was in Q1 or Q2. But we get that increasing frequency and increasing guests to drive overall throughput in our restaurant.

Speaker 10

Okay. Cool. That's everything for me.

Greg Levin (CEO and President)

Great. Thank you.

Operator (participant)

Thanks. And our next question will come from Andrew Wolf with Loop Capital Markets. Please go ahead.

Andrew Wolf (Senior Equity Analyst)

Thanks. I'm actually with CL King. I wanted to ask about the increased marketing spend, the sequential increase, and just tie that into what you called out and discussed at the Investor Day, just to see if it's consistent with the plans you talked about at the Investor Day, both in the amount, is it about the same, or? And secondly, the nature of it. If I recall back then, it was going to be a lot of digital marketing and free trial. And I just wanted to check to see basically what I'm getting at is, is it higher, or is the nature of the spending a little different given the promotional environment and the amount of spending that maybe competitors are putting out there in marketing as well? So I'm just trying to get to the nature of the spending and the amount.

Greg Levin (CEO and President)

Yeah. So Andrew, great question. And yeah, I would probably say it could be a tad of all the above. It's the same channels in the sense of where we were from TV, connected TV, and digital. If you think about also the Investor Day, we talked about this word of making Pizookie a household name, our dessert there. So we've got additional funding going around our Pizookie Pass that goes into Q3 because we're trying to build on the Pizookie brand and the ubiquity that we have in that. So that provides top-of-mind awareness for BJ's. And then as we looked at it as well, we also looked at a couple of other markets that we decided to kind of add in there.

So there's a little bit of an expansion of one additional market and a couple of additional digital areas or different digital markets that we have from year-over-year. So that plays into it. But a lot of this was actually kind of in our plans to begin with. And then as we think about it, because we're still kind of crafting some of the communication there, the question will be where that communication is going to be. Some will be on the Pizookie Pass and the Pizookie ubiquity that we talked about. Others will be more price-point specific on some of the great value that we already have in our business, whether it's some of the everyday value or Daily Brewhouse Specials. I think in today's environment, you're seeing that price point be very, very important.

So instead of it being more of a branding-type commercial, which we would use the Pizookie per se, it would be a little bit more price-point specific around Daily Brewhouse Specials or some of our everyday value menu items that we have.

Andrew Wolf (Senior Equity Analyst)

Got it. And is the latter maybe a bit of a change or adaptation to what's going on, more price point than you might have planned earlier?

Greg Levin (CEO and President)

Yeah, probably. I mean, the reason I say that somewhat hesitantly is we don't necessarily plan what the exact message is going to be a year out because we have different things that we kind of look at. But I think based on the kind of consumer environment, as I mentioned earlier, seeing obviously a lot of media being spent to drive awareness, most of it is around a value play. We're not going to be doing a crazy deep BOGO value play or something like that out there, but it's probably around a little bit more price certainty on some of the menu items that we have in our restaurants.

Andrew Wolf (Senior Equity Analyst)

Got it. Thank you.

Greg Levin (CEO and President)

You're welcome.

Operator (participant)

This will conclude our question-and-answer session. Also concluding today's call, we'd like to thank you for attending today's presentation. At this time, you may now disconnect.

Greg Levin (CEO and President)

Great. Thank you, everyone.

Thank you.