Good day, ladies and gentlemen, and welcome to the BJ's Restaurants, Inc. Third Quarter 2021 Earnings Release and Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Greg Levin, Chief Executive Officer and President. Please go ahead.

Gregory S. Levin - Chief Executive Officer, President and Director

Thank you, operator. Good afternoon, everyone, and welcome to BJ's Restaurants fiscal 2021 third quarter investor conference call and webcast. I'm Greg Levin, BJ's Chief Executive Officer and President. And joining me on the call today is Tom Houdek, our Chief Financial Officer. We also have Kevin Mayer, who has taken on the new role at BJ's as our Chief Growth and Brand Officer; and Greg Lynds, our Chief Development Officer, is also on hand for Q&A.

After the market closed today, we released our financial results for the third quarter of fiscal 2021, which ended Tuesday, September 28, 2021. You can view the full text of our earnings release on our website at www.bjsrestaurants.com.

Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives, and then Tom Houdek will provide some commentary on the quarter and the current environment. After that, we will open it up for questions. Rana, please go ahead.

Rana Schirmer - Director of SEC Reporting

Thanks, Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today's date, October 21, 2021. 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 refer 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.

Gregory S. Levin - Chief Executive Officer, President and Director

Thanks, Rana. As discussed on our Q2 call back in July, we entered Q3 with optimism as the country showed several signs of emerging from the pandemic. Our weekly sales average during the four weeks of July surpassed $107,000, which was 1.4% higher than sales levels from the same period in 2019. We noted that flavor was our biggest near-term challenge to realizing the true sales potential of our overall platform.

Realizing the strong demand for and appreciation for the BJ's concept, our teams were focused on ramping up staffing levels, so we could accommodate even more guests as the third quarter progressed. However, beginning in August with the spread of the COVID-19 Delta variant, casual dining industry comparable sales took a step backwards and declined approximately 370 basis points in August from July comparable sales level versus 2019 as measured by Black Box. During the same period, BJ's has outperformed the industry as sales declined approximately 260 basis points over the same weeks.

In addition to consumers pulling back on their dining occasions, staffing levels became more challenging in August and September as increased team member exclusions related to COVID cases resulted in reduced seating capacity and limited hours.

During the quarter, over 20% of our restaurants were placed on limited menus due to both staffing and supply chain shortages. Throughout this time, our goal was to make sure our team members were taken care of and that we delivered gold standard level of execution to our guests.

We understand that at times, these conscious decisions sacrifice short-term sales by limiting restaurant seating and capacity as well as menu items. However, in doing so, we know that the guests that are in our restaurants are getting the service, hospitality and food quality that they expect and will keep choosing BJ's over other concepts.

As a result, third quarter comparable restaurant sales finished down 0.5% compared to the same period in 2019, which reflects the deceleration from 1.4% of positive comps in July to negative 1% in August and negative 1.7% in September. At the same time, supply chains already stressed before the summer felt more acute pressures from staffing and transportation, that caused certain foods to increase further, particularly fresh meats. This caused a rapid rise in commodity food cost mid-quarter, which resulted in lower-than-anticipated restaurant operating margins.

In addition to the industry-wide sales pressures, BJ's also lapped a period with heavy promotion in 2019. We promoted a $3 Pizookie deal throughout September 2019 with TV support. Because of the capacity limitations related to current staffing levels, our meat to spend per restaurant was 40% lower in the third quarter of 2021 as compared to the same period in 2019.

As we said on the Q2 call and as I just reiterated, staffing remains our number one opportunity to drive near-term sales growth. We continue to see a direct benefit to our comps at restaurants with higher staffing levels. Towards this goal, our restaurants nearing their 2019 staffing levels increased to approximately half of our system at the end of Q3. That's a 10-percentage point improvement since the end of the second quarter.

Importantly, restaurants that were close to 2019 staffing achieved comparable restaurant sales of more than 5% over 2019 levels and continue to drive positive comparable restaurant sales into October. Conversely, about a quarter of our restaurants were 20% or more behind 2019 staffing levels and had high single-digit percentage comp sales decline in the third quarter compared to the same period in 2019. Excluding those restaurants, our comparable restaurant sales for the quarter would be positive low single digits.

I'm sharing this data and perspective because while our typical growth drivers revolve around menu, sales building initiatives and new sales channels, such as off-premise and our Beer Club, our current number one priority and the one that will quickly reverse the margin percentage impact on labor and other costs have on Q3 is sales. It's fully rebounding our staffing as this challenge posed a more significant headwind on traffic and sales during the third quarter than it did during the first half of this year.

Additionally, our restaurants that were closer to fully staffed and able to drive positive comparable restaurant sales in aggregate had restaurant-level margins that were over 150 basis points better than our understaffed restaurant. So despite the current pandemic-induced inflationary pressures on our business, the restaurant business still has a high degree of fixed and semi-fixed costs that are very leverageable by driving top line sales.

Looking to the future, I remain incredibly confident in BJ's ability to return to industry-leading results because of four key factors. One, our differentiated concept and ability to execute at the gold standard level; second is our team members and the BJ's culture; third is our guest affinity to our brand offerings, value and hospitality; and fourth, our very significant near- and long-term restaurant growth opportunity.

First, our differentiated concept execution. We are unmatched in the industry, given our polished casual positioning, best-in-class bar statement and AUVs approaching $6 million on an average guest check in the mid- to high teens. The way our concept is designed allows guests to visit BJ's for lunch, mid-afternoon, dinner and late night. There are not many casual dining concepts or for that matter, restaurants in general that have the ability to drive sales throughout the day.

With that in mind, we have invested in productivity and technology initiatives so that we can execute on what we internally call the gold standard level of execution. This includes refined marketing and guest loyalty programs, internally developed technology as that gives us ability to rapidly iterate compared to our peers, including our own internally developed app and QR code linked digital menu and our server handheld tablets.

We have large and flexible kitchens that allow us to have a broad and innovative menu to stay current with food trends. And we have craft beer authority that is unparalleled in the industry. In fact, just last month, we won another gold medal at the Great American Beer Festival.

We also have many sales building initiatives and opportunities, including continuing to grow off-premise sales through takeout and third-party delivery, building out our catering infrastructure, which is in its very early stages, and growing our Beer Club subscription service, which no one can replicate at the scale that we can at BJ's because of our internal brewing capabilities. The bottom line is, we are clearly a differentiated concept with strong competitive advantages and tremendous future opportunities to grow our weekly sales average.

Next, our team members. We continue to bolster a first-class operations team to lead the execution in our restaurants while readying for the next stage of BJ's growth. We are fortunate to have cultivated a deep bench of talent and to promote from within to maintain our leading high-performance culture and standards while undertaking the expansion we see ahead to drive future growth.

In order to get ready for new restaurant growth, we recently added the role of Senior Vice President of Operations to our executive team, and this individual is solely responsible for leading day-to-day restaurant operations, thus allowing our Executive Vice President of Operations to help guide and integrate our longer-term strategy over the hiring, training, development and retention of our new managers and team members.

We also made some other changes during the quarter, including a new Vice President of Operations to oversee much of the East Coast and six new directors of operations and several new general managers to lead the day-to-day operations of our regions and restaurants. We have high expectations for all of these newly elevated leaders to make major positive contributions to our business in the coming quarters as we build back our staffing levels.

Additionally, we've added talent at our restaurant support center to drive the next phase of our weekly sales growth as we emerge from the pandemic, including a new Senior Vice President of Culinary, a new leader of our e-commerce and digital experience team to help build our technology to better serve our guests, a new leader of our beer subscription services to advance our Beer Club initiative as well as a new leader to drive marketing and a newly created position to drive quick prototyping, ideation and innovation at BJ's.

Next, our guests. This quarter, we completed a seminal project to develop a deeper understanding into why our most valuable guests choose BJ's above all other concepts. The team spent countless hours speaking with and listening to our best guests. And I love what we heard. BJ's differentiated position is defined by an environment that energizes the senses with an inviting bar at the core and a menu with familiar offerings made with a Brewhouse twist.

Guests raved about our gold standard level of service and the value and breadth we offer across our menu with food quality that rivals restaurants with much higher prices. Our most valuable guests view BJ's as an escape from their ordinary day and they come to BJ's for all types of social dining occasions.

Armed with a deeper appreciation of our best guests and our attributes that attract them, we can more effectively target and drive even more brand affinity and traffic to our restaurants. To that end, we are beginning to develop our own internal guest personalization platform to better engage with our guests in a one-on-one manner. We are in the early innings, but we are already using the learnings and the significant guest data we have been capturing to help guide decisions across our business to best serve our guests.

Last, but very importantly, our significant near- and long-term restaurant growth opportunity. I am a firm believer that a key indicator of the future success of a brand is the performance of its new restaurant openings. Our recent openings in Lansing, Michigan and Merrillville, Indiana continue to perform strongly and above our system average sales. Communities are excited to welcome BJ's, and it shows with these restaurants opening and remaining fully staffed.

Looking ahead, we have a terrific pipeline of sites identified for new BJ's restaurants in 2022 and beyond. We have been unwavering in our real estate standards for top sites and premier trade areas, and we believe our openings in the next few years will be some of our best yet. And remember, we have a clear path to at least 425 domestic locations which is about double our current footprint.

These opportunities plus other initiatives such as catering and our Beer Club will be instrumental in BJ's long-term strategic plan. We are rigorously analyzing other potential sales opportunities given our differentiation in the casual dining industry. Additionally, we are using our learnings from our best guests in prioritizing our investments for 2022 and beyond.

After we present our plan to our Board of Directors in December, I look forward to sharing more about these initiatives with our investors and analysts.

I'd like to finish by taking a moment to acknowledge every one of our team members. I am incredibly proud of our team's grit and devotion to delivering gold standard experiences to our guests despite the significant challenges across the restaurant industry. When considering response to current pressures, we remain steadfast in our approach of prudently making decisions that are right for BJ's over the long term and to best position us to continue to lead in sales, unit growth and shareholder returns in the years to come.

Now let me turn it over to Tom to provide a more detailed update from the quarter and the current trends. Tom?

Tom A. Houdek - Senior Vice President and Chief Financial Officer

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 third quarter, we reported total sales of $282.2 million. Our sales increased 41.9% versus the third quarter of 2020. Compared to the third quarter of 2019, sales decreased 0.5% on a comparable restaurant basis. The seasonally lower sales also pressured by renewed pandemic concerns and higher cost pressures resulted in restaurant-level operating margins of 11.2%, which improved by 170 basis points as compared to Q3 2020, but trailed Q3 2019 by 230 basis points.

Adjusted EBITDA was $16.4 million and 5.8% of sales in our third quarter, beating Q3 2020 EBITDA, but behind Q3 2019 EBITDA of $24.5 million. We reported net loss of $2.2 million and diluted net loss per share of $0.09 on a GAAP basis. As Greg just outlined, we started the quarter with July weekly sales per restaurant averaging more than $107,000 and comparable sales were 1.4% ahead of July 2019 levels. Encouragingly, our on-premise sales were within 10 percentage points of our 2019 levels, and our off-premise sales remained approximately double of 2019 levels.

As we entered our seasonally slower months of August and September, we and the rest of the industry at large faced the added headwind from the Delta variant surging in communities across the country, impacting both guest demand and our ability to staff restaurants given renewed COVID exclusions of our team members.

Our weekly sales averages declined to $104,000 in August and $97,000 in September, as our sales per comparable restaurants declined to negative 1% in August and negative 1.7% in September as compared to 2019, driven by a pullback of dine-in sales more than offsetting modest off-premise gains.

In terms of dayparts, lunch and late night remain the most impacted, which, when combined, weighed on our comp by more than 3 percentage points in the quarter. We expect lunch to rebound once more employees return to offices in the new year, a more delayed timeline than we expected before the Delta spread.

Our reduced hours due to staffing shortages is directly impacting late night. Our restaurants closed 1.3 hours earlier on average through the third quarter as compared to pre-pandemic hours due to staffing limitations. Overall, we lost approximately 25,000 operating hours across the system in the third quarter versus the same period in 2019 or approximately 10% of our hours concentrated in the late-night daypart.

As Greg mentioned, in Q3 2019, we spent approximately two-thirds more in media dollars promoting BJ's brand across channels, including television, when compared to our Q3 2021 spend levels. We also utilized more discounting to drive traffic, including a $3 Pizookie special that was promoted throughout September 2019. Making the conservative assumption that our media investment just breakeven, the incremental media spend in our 2019 base sales translates to approximately 100 basis point of comp headwind in the current quarter.

Moving to expenses. Our cost of sales in the quarter was 27.2% of sales, which was unfavorable to the prior year and to our third quarter of 2019. Cost of sales was pressured by food cost inflation of approximately 10%, driven by our popular meats, including ribs, prime rib, ribeye and tri-tip and salmon. We serve only fresh meats to maintain our quality standards, which have experienced some of the highest impacts from inflation. And because they are fresh, not frozen, many of these meat products cannot be contracted for long periods of time.

Labor and benefits expenses at 37.2% of sales in the quarter were favorable to both prior year and our third quarter of 2019. The line includes a $3.1 million employee retention tax credit in conjunction with the CARES Act, which, if excluded, would result in our labor and benefits being unfavorable to 2019 and 2020. As a result, our labor and benefits expense tend to deleverage in the third quarter when sales are seasonally low than leverage again in the fourth quarter when sales levels pick back up.

Our training and overtime hours remained elevated in the quarter due to increased hiring. And compared to Q3 of 2019, our training and overtime hours impacted labor by 70 basis points. As we continue adding more team members to our restaurants, we expect the additional labor cost dollars to be more than offset by the incremental profit from the increased sales we can generate.

Occupancy and operating expenses at 24.4% of sales in the quarter were favorable to the prior year, but unfavorable to our third quarter of 2019. Occupancy and operating expenses remained elevated due in part to our continued high level of off-premise sales, which carry the added cost of third-party delivery commissions and to-go packaging. We also added back certain outside services and invested on refreshing certain restaurants to like new first class as we welcome back more guests into our restaurants and get ready for the busier Q4 sales period.

Looking ahead to the fourth quarter, our sales continued to build in October. For the most recent week, we generated approximately $105,000 average weekly sales per restaurant, which is 8% higher than our average weekly sales in September and represented comparable sales of positive 0.2% as compared to the same week in 2019 and an improvement over recent weeks.

On staffing, as Greg mentioned, we finished the quarter with about half of our restaurants with staffing levels close to 2019 levels, and we continue to make strides in hiring, so we can fully capitalize on what we expect to be a busy holiday season. We are also going to test some additional marketing, targeting approximately a quarter of our restaurants with the best opportunity to take advantage of the guest traffic based on current staffing levels. Our messaging is centered on brand building and promoting our everyday value, including our daily Brewhouse Specials.

In regards to restaurant hours, we lost more than 25,000 hours in Q3 2021 versus Q3 2019. However, with our recent staffing levels and stepping level improvements, we've been able to extend hours at a number of our restaurants. Our restaurants now closed one hour earlier on average, improving from closing 1.3 hours earlier through the third quarter. We intend to continue adding back hours when staffing levels are adequate to execute at our high standards. Returning to pre-COVID hours is a $1,000 to $2,000 weekly sales average opportunity for our late-night business.

Finally, pricing. As inflation started to pick up in Q2 2021, we implemented a 2.5% of pricing in July, which was at the high end of our historical pricing rounds but still below inflationary levels. With food costs reaccelerating starting in mid-Q3, we are set to take an additional 1.4% round of pricing in the coming weeks. This level of pricing is still below the recent inflationary pressures we have experienced. However, the number one way for BJ's to protect and leverage margins is to improve our staffing levels. We know that fully stepped restaurants drive positive comparable restaurant sales and leverage the fixed cost in our business. Therefore, we plan to protect our traffic through price affordability and value at BJ's as we continue building our staffing levels.

After our November menu update and pricing round, our next menu rollout is scheduled for February, at which time we will determine the magnitude of additional pricing to be taken, based on how commodities and labor have trended as our economy gets on more settled ground.

With regards to the middle of the P&L, we expect these commodity headwinds to hold our cost of sales in the low 27% area for the fourth quarter, consistent with Q3 and taking into account our planned November pricing rounds.

From a labor perspective, we expect labor in the mid-37% range in the fourth quarter, accounting for modest sales growth, current wage trends and the labor investment as we continue to hire and train team members. We expect an increase in labor efficiency once we are past the short-term investment in hiring and training. Ultimately, the sales we generated in the fourth quarter will be a key driver of our ability to leverage labor costs.

For operating and occupancy costs, including marketing, we expect to remain around $25,000 per restaurant operating week average for the balance of the year, consistent with Q3 levels. This spending level includes the additional marketing discussed earlier.

G&A for the third quarter was $17.3 million. I anticipate G&A to be in the $18 million to $18.5 million range in Q4, which includes recent investments and talent that Greg outlined and to account for general inflation in certain G&A costs and to return to more normal levels of business activity, including travel. We are now targeting G&A of around $68 million for 2021, which includes $6 million for incentive compensation compared to less than $500,000 booked in 2020 due to the impact of COVID on the business. As always, depending on results, the $6 million of incentive compensation may vary. Our G&A budget also includes approximately $7 million related to equity compensation, which is about in line with 2020.

Additionally, I'm expecting our diluted shares outstanding to be approximately $24 million for the fourth quarter, which will reflect options and warrants in the fully diluted share count once we return to a net income position.

Turning to the balance sheet. We repaid an additional $10 million of debt in the third quarter, reducing our debt balance to $71.8 million. We ended the quarter with net debt of about $12 million. We continue to use our strong liquidity and cash flow to fuel growth with construction now started on three new restaurants scheduled to open in early 2022 with another location where we will break ground in the coming weeks.

Our new restaurant pipeline is robust and filled with high potential sites that are a mix of infill in some of our most successful markets and expansion into adjacent new markets. We are very pleased with the strength of our balance sheet, and we'll continue and we will remain consistent in our approach of prioritizing growth driving investments to build new restaurants, improve our existing restaurants and fund sales driving initiatives.

Looking ahead to 2022, while our planning process is still underway, we anticipate growing comparable restaurant sales above 2019 levels as staffing is rebuilt across our restaurants and dine-in traffic continues to recover. Wage rates will have some inflation as the tight labor market continues, and we take the last $1 step to $15 minimum wage in California. However, we expect to be able to leverage the additional sales to effectively manage labor rate - to manage labor increases. We expect food cost to remain high, but moderate somewhat, while our ongoing pricing actions regain margin while we maintain our leading value proposition. Of our eight or more new restaurants opening slated for 2022, we expect to be in a position to open four of the locations in the first half.

In summary, we know the best way to grow margins is to grow sales. And data from Q3 clearly indicates that by fully restaffing our platform, we can accelerate top line momentum. We have a clear path to sales growth and margin recovery, and our long-term strategy remains intact.

While we have seen new challenges present throughout this pandemic, we continue to meet the challenges head on, manage our business for both near and long-term objectives and remain steadfast and are focused on delivering our guests the best experience, which will allow us to continue delivering outside growth in years to come.

Thank you for your time today, and we'll now open the call to your questions. Operator?

Question & Answers

Operator

Thank you. [Operator Instructions] We'll take our first question from Alex Slagle with Jefferies. Please go ahead.

Alex Slagle - Jefferies - Analyst

Thank you. I had a question on the new units you've opened up. If you could talk a little bit more about those and remind us sort of the square footage and features those builds, and how those sales metrics you provided compared to previous classes at this early stage?

Gregory S. Levin - Chief Executive Officer, President and Director

Alex, hey, it's Greg Levin. I'll probably let Greg Lynds touch on some of this as well. But those restaurants are what we call our Proto 2020 restaurants, and they've got kind of more of a circular bar versus our, what I would call our Proto 7,000 and Proto 6000 or prior generation of restaurants. From a square footage standpoint, though, they're pretty much in line with our prior restaurants. So there's not much difference between that. However, that circular bar, they end up having a patio that they can roll out to, which helps us from that standpoint. And it just actually adds for a more inviting feeling within the restaurants.

When you look at the overall weekly sales average in both those restaurants, they're really, really strong in that regard, and they're holding up really well. When I look at like Lansing being in Michigan, which has been a good market for us as well. Those sales levels are in line, if not better than other restaurants in the Michigan area. And I think the Merrillville one, which is more of a suburb going into the Chicago area is also a leader within that industry or within that area and also holding up better than traditional restaurants. I don't know, Greg Lynds, anything different on those restaurants?

Gregory S. Lynds - Executive Vice President and Chief Development Officer

No, no. The class of 2021, which is Merrillville and Lansing is pretty much like 2020, 2019 in terms of square footage and number of seats. So as Greg mentioned, the indoor/outdoor patio that we have in the class of 2021 is a little different, has a few more seats. But other than that, they're very similar to the other classes.

Gregory S. Levin - Chief Executive Officer, President and Director

Alex, the one thing I would say though, being a little bit newer to this position, obviously, been at BJ's for a while, is the core and the difference in that restaurant versus some of our older restaurants, is obviously, it's a little bit lighter in that regard. We like the way the round bar looks. Some of the artwork is more contemporary and feel the Brewhouse void a little bit more that I think is sometimes missing in some of our older restaurants. And as we go into next year, as I work with the team here and put together a plan, I think we'll see some remodels being done in some of our existing restaurants to get them to look a little bit more like some of our Proto 2020 restaurants.

Alex Slagle - Jefferies - Analyst

Got it. And the patios you had closed those down, right, I think after the second quarter or so, the temporary ones?

Gregory S. Levin - Chief Executive Officer, President and Director

Yes. The temporary patios have been closed down in the majority of restaurants. We do have a few here in California, a couple of other places where we kind of kept some of that additional patios. But for the most part, they have been closed down. We found - just off hand, we found when we left them open even during Delta variant, because we kind of brought some back. Guests really want to get inside the restaurant. Some of it might have been the heat in the summertime. But as soon as those restaurant doors were open, they really flocked inside the restaurant.

Alex Slagle - Jefferies - Analyst

Okay. And then just a question on the restaurant level margins, and you gave a lot of good details I know. I guess, it's all sort of changing as we move through this. But I mean, on your longer-term restaurant level margin views, I mean, is there anything you've seen in the third quarter in terms of permanent cost increases or structural changes that would really alter your view on eventually being able to get back to the levels of 2018 that you had seen when your volumes can fully recover?

Gregory S. Levin - Chief Executive Officer, President and Director

Yes. So we spent a lot of time looking at that, looking at our positive restaurants versus our negative restaurants and so forth. And I generally think looking at this business and then the restaurant business in general, there is still a lot of fixed and semi-fixed costs that get leverage when you drive top line sales from that standpoint. When we look at the commodity side, and we weren't expecting a 10% increase in that regard. And we look at, frankly, the mix in our business. Guests are really gravitating much more towards kind of the comfort foods, more in the red meat. That had an outsized impact on us and the fact that we use fresh makes a little bit more challenging to contract.

Taking all that aside and thinking about where we are from a pricing today, which everybody is going to have to take some pricing, I think the ability of adding some pricing over time, and we want to do it right because that value and that price point affordability and that price point is key to us is really, really important in regards to driving additional sales. But as we have that, we continue to drive the off-premise sales in our business and the fact that there's so much fixed and semi-fixed costs in this business, we have the ability and the opportunity to get back to more historic margins.

So I still see that in our game plan. I don't think anything has changed from a longer-term perspective. I think it's going to be a little bit more challenging here as we just saw in the third quarter in regards to training and the fact that the delivery company shows up at 12 o'clock in the middle of a month shift. That's a real challenge for us in that regard, and it pulls people off. We have to pay overtime and everything else.

I think as our country works through some of these supply chain bottlenecks, and we get back to a more even business, so to speak, or more settled footing on the economy, I have no doubt that we can continue to leverage our business and move it forward to historic margins.

Alex Slagle - Jefferies - Analyst

Got it. Thank you. I'll pass it along.

Operator

We'll take our next question from Drew North with Baird. Please go ahead.

Drew North - Baird - Analyst

Thanks for taking the question. First, I wanted to ask about trends in October. Thanks for sharing the perspective on the various cohorts and the most recent week. But taken together for the month, how are trends tracking for the system relative to 2019? I think it would be helpful to better understand where you're tracking earlier in the quarter and get us all on the same page.

Gregory S. Levin - Chief Executive Officer, President and Director

Yes. So if I had to look at it from a quarter standpoint, and Tom can chime in here as well. The quarter started off a little bit more challenging as we went over a free Pizookie day, and then we went over a $10 off $40 marketing in 2019. And as a result, I think that first week or week-and-half, we were down in the kind of 3% to 4% range. Since that time, we flattened out. We finished last week, as Tom said on the call, we finished out at positive comp sales, plus 0.2%, not a lot there from that standpoint, but still we like the way that trend is going. And on top of that, we've moved our weekly sales average back into the 1.05%, 1.06% range. And at 1.05% and 1.06%, it allows us to be a little bit better in regards to managing the margins and getting leverage within our business. So if I look at that and look at how 2019 shaped up, October is generally your lowest weekly sales average of the fourth quarter. So I would expect our weekly sales averages still to move in the same - in that direction, meaning the weekly sales averages go up, especially as we hire more people and assuming it was not a new variant out there of COVID. But overall, I think we're probably about down 2%, but we've kind of moved from more recent to a flattish number.

Drew North - Baird - Analyst

That's helpful. And then I wanted to also ask about the outlook for labor and commodity inflation in 2022. I know it's early and you provided some directional color. But based on what you're seeing out there, how are you thinking about the level of labor inflation and commodity inflation next year? And then how are you thinking about pricing against that inflation? Do you expect to take an additional pricing beyond the November price increase you mentioned?

Gregory S. Levin - Chief Executive Officer, President and Director

Yes. Drew, we mentioned in our formal remarks and Tom's that come February is our next general menu rollout. And we will take some menu pricing at that time. We've got another $1 of minimum wage hitting here in California. And then I think we're going to be in a really good position from that standpoint in California going forward in regards to just annual increases, which have been about five years in a row, moving from about $10 to $15 from that perspective. As a result, I think you're still going to see inflation probably in - or labor inflation probably kind of still in the mid- to high single digits, even though it does seem to be abating a little bit.

I think what we're seeing differently is we're seeing people show up for interviews and then show up for their jobs for the first day. We didn't really see that at the very beginning as the economy opened up. We saw people that would kind of book an interview, but they didn't show up for it or we find people that might not have shown up for a job. So as Tom mentioned, we've got about 70 basis points right now in over time and training. And that's a lot for us, 70 basis points over 2019. That's because we're actually getting close to maximum training that we can do in a restaurant.

If we're down 30 people in a restaurant, just throwing a number out like that, we can't train all 30 of them in one week. We can probably train at max six to seven people per restaurant. So it takes a while for us to get through that. The good news is we're getting through that now. We're seeing people show up. We're seeing people really want a job and come back, and we're also seeing higher retention rates or lower turnover going into September and October across the board. So really seen within our business that kind of going into August and - August was really kind of the apex. And then from there, it's come down.

On supply chain, we're starting to see that abate a little bit as well. I think as we go into next year, it will start to flatten out. And I do think over time, we could see cost of sales, one, from pricing and other things starting to get below the 27% getting back to more of our historic norms over time. Tom, you got anything else?

Tom A. Houdek - Senior Vice President and Chief Financial Officer

Yes. And I think to Greg's point, when we think of the cost of sales inflation next year, we're looking at it both on an overall inflation basis as well as just a rolling basis. And as we think of the recent cost in our - especially these fresh meats, we've seen some of the prices start to tick down modestly. So we still expect some more cost of sales inflation on an absolute basis next year. But it seems like at least in some of these new categories that at least we'll be moving in the right direction there. And to Greg's point, with pricing, it's all helpful to margins.

Gregory S. Levin - Chief Executive Officer, President and Director

And Drew, to your first part of the question was about pricing next year, which as I mentioned, we will take in February. We don't know the amount of pricing. We're not going to take pricing right now in what we consider to be kind of this pandemic-induced bubble in that regard. Once you've taken pricing and you've lost that price point affordability with your guests, you don't get it back. And we've got so much opportunity to grow this business for the long term that we understand what's going on right now. We'd rather see supply chains start to normalize, get a better understanding where labor is going and some of these other things around supply chain and then take the appropriate pricing at that time and frankly, have that pricing powder still inside BJ's to deploy as we need it.

Drew North - Baird - Analyst

It all makes sense. Thank you.

Operator

We'll take our next question from Nick Setyan with Wedbush Securities. Please go ahead.

Nick Setyan - Wedbush Securities - Analyst

Thank you. So first, I guess, appreciating all the detail you guys gave around the staffing headwind. But just all in all, is there a way to quantify what staffing headwind was to comps in Q3? I mean it sounds like it's in the 5% to 6% range. Is that correct?

Gregory S. Levin - Chief Executive Officer, President and Director

Yes, that's correct. If we look at the limited hours, we looked at the restaurants that had below 90% staffing levels for the most part. And the fact that we had to put a lot of restaurants on a limited menu. When we look at all those things, Nick, they kind of come into the numbers that you just talked about there.

Our limited menu restaurants, they end up with an average check of about $0.35 or less or $0.35 or more than restaurants that had full menu from that perspective. They're also closing their doors more than one to two hours greater. So we lose that late night business. And then obviously, we're not seating all the tables.

So when we look at those deltas on those things, we see that. The other thing that we just recently did is we finally got physical menus back in front of our guests. One of the things we've heard from our guests is they love having a physical menu. And I think we are all really excited in this business to get to HTML menus because everybody is thinking we're going to eliminate printing costs and so forth from that standpoint. But we've seen our guests like a physical menu. We've seen other restaurants with a physical menu. There's a sense of normalcy that we hear from our guests. We know that the physical menu, which we're able to roll out here in November is also worth about $0.70 more per average check.

So there's a lot of good things we have going in the right direction, moving the business forward. It's just Q3, the way it kind of started and then what came through from really the delta and our exclusions in our restaurants, really put a challenge in front of us. And frankly, we would rather look at the business from the long-term perspective and make sure we're taking care of our team members taking care of the guests that come to BJ's and no doubt we'll build it over the long-term.

Nick Setyan - Wedbush Securities - Analyst

And then on the labor side, I think you said you went from 40% to 50% fully staffed in the Q3. I guess given just the recent trends in terms of hiring, where do you expect to be at the end of Q4? And then, I guess, what percentage of the understaffed stores, can you say maybe each store that's understaffed on average, we still need about 10% more employees, 5% more employees just to give us some context?

Gregory S. Levin - Chief Executive Officer, President and Director

I don't know if I can give you that context. I think what I would tell you is when we get to close to 2019, which you could probably think somewhere in the neighborhood of upper 80s to 90% or close to 2019 levels, we can generate full restaurant sales in that regard. So I can't tell you, thinking about it, what or how much each restaurant is missing? And is it 10 or 20 employees from that perspective. That's kind of not part of it there.

Nick, look, if you had - and we've said this before, we'd love to be staffed yesterday in that regard. And our goal was to be staffed up at the end of the third quarter. And I think us as well as we've heard from other companies, got a little bit challenged as the hiring didn't pick up as much as people might have thought early on in August and September. I think a lot of that was due to the Delta variant. I think that's also due to the fact that people have pretty solid balance sheets and might not need to come back to work right away. But as I mentioned just a few moments earlier, we're seeing key members show up or new employees show up, I should say. We're seeing that number as we just mentioned get better throughout the quarter, and it looks like it's getting better here into Q4.

Our goal, and I think Tom mentioned this on the call was to get every restaurant back to a full menu by early November. And to get restaurants back to a full menu by early November, means our goal is to have all of our restaurants staffed up by early November.

Nick Setyan - Wedbush Securities - Analyst

And would that also imply full hours, so like not the one hour less at night?

Gregory S. Levin - Chief Executive Officer, President and Director

Our goal would be to get there. I'm not sure on that one. I think that's going to be the last move for us is extending some of that hours. I think certain restaurants are already extending the hours because we know we have the capability. But as those team members get trained, we can put the full menu in place, that's going to be the first step. The next one then would be to additionally close the gap on the hours.

Nick Setyan - Wedbush Securities - Analyst

Okay. And then just last question. I think we talked about 2.5% pricing, plus 1.4% pricing. And then Q1, we still have the February - pricing through February. So that puts us in Q1, it would put us with somewhere in that 4% to 4.5% range?

Gregory S. Levin - Chief Executive Officer, President and Director

That would be correct. Kind of going in if you got 2.5% and 1.4%, that put you, let's just call it, right at 4%. And then sometime in kind of, I would say, mid- to early February or early to mid-February, will be when our next menu rolls out.

Nick Setyan - Wedbush Securities - Analyst

Got it. Thank you very much.

Gregory S. Levin - Chief Executive Officer, President and Director

You're welcome.

Operator

We'll take our next question from Todd Brooks with CL King & Associates. Please go ahead.

Todd Brooks - CL King & Associates - Analyst

Hey. Good afternoon, folks. Quick question for you on the top line side across and we're very focused on the expenses in the quarter and the headwinds. But as we're emerging from the pandemic, and I know Delta caused a wiggle in some traffic, but it seemed like it was more of an operational curtailment.

Greg, is there any change in your thinking about AUVs really building back to a substantially higher level as we normalize coming out of the pandemic as far as success that you're still seeing with off-premise revenue retention, return of dine-in demand when the situation is a little bit more normal and some of the other incremental drivers of revenues? Just your thoughts on when we get to a new normal where AUVs could be tracking towards?

Gregory S. Levin - Chief Executive Officer, President and Director

There is nothing that has me changed. There's nothing that has changed my mind where BJ's can go from a weekly sales average. I think not only what you just talked about there in regards to holding off-premise, in fact, frankly, growing off-premise knowing the fact that we brought somebody on board to lead Beer Club, which has drove increased frequency of our current guests from that perspective, knowing that we've got catering that we really haven't even rolled out from that side of it and the other initiatives around off-premise as well as the fact that as guests have come into our restaurants, we're growing that weekly sales average in many of our existing restaurants that are fully staffed.

So I still look at the fact that we can get off-premise from what's right now and that kind of, let's call it, $20,000 to $25,000 range depending on seasonality. I think there's another $5,000 there in total off-premise, if not more. And then I think we have that ability still to drive the dining room, which frankly, is kind of running in the mid 85% range. So getting the dining back and holding on the off-premise, I think our weekly sales average goes above where it's been historically.

We have not seen as we kind of settled into where we are right now, we have not seen the trade-off anymore between off-premise and dining room. I think that happened as dining rooms opened up and guests started going back. But now that all your dining rooms are open, off-premise has held really well in that regard. I think we haven't done a lot of promotions around off-premise, but it's held from that standpoint. And it's about getting our restaurants staffed and growing that dining room and those together are going to I think put our weekly sales average above 2019 levels.

Todd Brooks - CL King & Associates - Analyst

That's great. That's great. And then you guys talked about the relatively fully staffed cohort and the performance in Q3. Can we talk about just the performance in Q4? Is it still kind of that group of stores running up in that mid-single-digit type of range? Any change there? Is that actually inflecting higher as we come out of that seasonal slow period, August, September?

Gregory S. Levin - Chief Executive Officer, President and Director

Right now, it's still primarily those same cohorts of restaurants that are driving that. This last week, those restaurants start to go up in regards to our weekly sales average as we got through the free Pizookie day and some of the other things. And we've seen our overall weekly sales average move into the $105,000 plus. So we have seen those restaurants move forward. We actually set a record last week at one of our restaurants. So we're seeing those move forward.

Where we're seeing the challenge, we've talked about this before, so this is not anything new, but it's still the Bay Area is a challenge, and we are expecting office buildings to come back or people come back in their offices in originally around September and October, and that's going to be pushed to 2022. So I think we've got that opportunity there to grow that part of it. And then the kind of - some of our restaurants on the Eastern Seaboard just are not as staffed as we'd like to be, and they're slowly moving in the right direction. But as you kind of pull back from some of those restaurants are ones that are fully staffed are doing what we expect them to do in driving positive comp sales.

Todd Brooks - CL King & Associates - Analyst

Okay. And the final one for me, and then I'll pass it along. You talked about seasonally average weekly sales would build kind of from here on out through the end of the year just as we get into the heart of the holiday season. Is there anything we have to be aware of from a fiscal '19 type of compare from other promotional activities that might not allow it to maybe, A, grow in a linear fashion and, B, make the comparison tougher than we might realize over kind of the November, December window?

Gregory S. Levin - Chief Executive Officer, President and Director

Not to the same degree. But I will say, we spent closer to - and I've got to pull up '19 here. But I think we spent in marketing closer to $8 million. Let's see. Let me pull up my '19 numbers here. In '19, we spent almost $8 million in Q4 in marketing, and our marketing here is going to be somewhere in the kind of 5%, 5.5% range. So it is less marketing dollars being spent right now. That $10 off $40 was probably a big one in the free Pizookie day that we did at the beginning of October and the $3 Pizookie in September were probably the highest hurdles we had to go over. But we're not at a point - frankly, we're not at a point yet because our restaurants aren't fully staffed to lean all the way into marketing.

As I said on my part of the call, I would love to do other sales initiatives, some of the things we've learned from our best guests and things like that, that are coming forward next year. But really, we know that right now if we drive staffing into our restaurants, we can drive top line sales and then we can leverage the fixed and semi-fixed costs within our business.

Todd Brooks - CL King & Associates - Analyst

So if you get the staffing goals hit for November, you would expect to see average weekly sales kind of grow from this latest week in October, where you're in that 105 range then, just seasonally?

Gregory S. Levin - Chief Executive Officer, President and Director

That's correct.

Todd Brooks - CL King & Associates - Analyst

Okay. Great. Thanks a lot.

Operator

We'll take our next question from Nicole Miller with Piper Sandler. Please go ahead.

Nicole Miller - Piper Sandler - Analyst

Thank you. Good afternoon. Can understand, I think, and definitely appreciate that you're almost fully staffed like at your ideal matrix. But when you think about what you've learned from the employee, how do you think about whether any of this is transitory? And if it's not, what measures would you take and when? I'm thinking about well beyond higher wage rates, but do you overstaff certain shifts knowing that there's pressure when people call in or whatever? How do you think about that and frame it up, I guess, if it's not transitory? Thanks.

Gregory S. Levin - Chief Executive Officer, President and Director

Nicole, that's a great question. I think everybody in the industry continues to figure out how to deal with the employee challenges out there. And I'm not sure anybody has come up with the magic pill yet. And we hear all the different initiatives out there. And believe me, we do them as well from that standpoint. Maybe we don't celebrate them publicly as much as other companies do in that regard. But we do things like team member appreciation, we do raffles, shift raffles, referral bonuses and so forth from that standpoint.

I think what you might end up seeing in this business over time is more around predictive scheduling or from that standpoint, where team members and we try to do this, make sure they get guaranteed shifts versus if the sales are slow or if the sales are going or the sales are stronger, keeping people on from that perspective. I think that's one that I think everybody in the industry is probably looking at because a lot of team members would like to have more predictability and be able to work around certain parts of their schedule. I think that plays an important aspect of it.

And then frankly, and I've always been a believer of this is it's about the culture within the four walls of those restaurants. And we spend a lot of time with our general managers, teaching them to take care of the team members from a culture standpoint. People aren't running away from one job to the next for $0.10 more in pay or $0.25 more on pay, et cetera, from that standpoint. It's about the balance within the restaurant, both within the kitchen and within the dining room and giving sometimes better predictive scheduling can play into that from that standpoint and how our general managers take care of our team members. All of that plays into, frankly, providing a better experience for our team members. And those are things that we continue to work on. as well as all the other things in regards to offerings that could be used out there.

Nicole Miller - Piper Sandler - Analyst

That's it for me. That's the color I was looking for. Thank you.

Gregory S. Levin - Chief Executive Officer, President and Director

You're welcome.

Operator

We'll take our next question from Sharon Zackfia with William Blair. Please go ahead.

Alex - William Blair - Analyst

This is Alex [Phonetic] on for Sharon. Just a couple of quick ones. So maybe could you just quantify where the overall staffing level is right now versus pre-COVID? And what your line of sight may be to be returning to full staffing? And what could underscore your confidence in restoring those hours and menus by early November?

Gregory S. Levin - Chief Executive Officer, President and Director

Well, you kind of answered your question by saying the menu rolls out in November because that's when we'd like to be there in that regard. So that's our timeline that we're going after. I do think changes in the - in COVID could play into that from that standpoint. I'm trying to pull up and see if I've got like kind of the staffing levels, I don't know, do you have it, Tom?

Tom A. Houdek - Senior Vice President and Chief Financial Officer

It's sitting on average at about 90% across our system. Some have more staffing than we did in 2019, but obviously some a bit less. So just looking at the average, it's right around 90%.

Alex - William Blair - Analyst

Okay. Great. Thanks. And then just one more. So in those restaurants that are staffed below 2019 levels, is there any kind of underlying common thread between those? And what tactics do you guys plan to use to bolster those staffing levels?

Gregory S. Levin - Chief Executive Officer, President and Director

So it's actually an interesting question. And when we look at that, I think there's a couple of things. Here in California, maybe Texas and some of the other markets where we've got a lot of brand recognition, have been around there for a while, it's easier to get team members back, but it's also easier to borrow team members. So if we've got restaurants in California that are eight to 10 miles away, we can borrow team members, which can make that work really well.

So when we start to look at some of the areas that are more challenged, it's some of our newer markets. It's somewhere maybe the restaurants don't have a sister restaurant close to them. Maybe the sister restaurant is two hours away or three hours away. So it's much more difficult to borrow team members. So that's one of the common themes that we see in that regard when we look at kind of the staffing levels. It's not - I wouldn't call it 100%, like with a - I wouldn't say it's an R-squared of one in that regard, but it's a common theme that we see on some of our restaurants. And then as I said earlier, and I think Nicole asked a really great question on that, just about getting people back and the things we're doing, and we're doing like all other companies are doing, whether they are job fairs, referrals going in and just talking to different people, looking at the restaurants, providing opportunities to grow from whether it's a server assistant into a server or working in the different areas of the kitchen. We've changed up some of our training materials as well to make things easier and take on smaller areas to begin from that standpoint. And then we've done a lot around culture in regards to team building weeks and team appreciation weeks as well as raffles and so forth to bring people on board.

Alex - William Blair - Analyst

Okay, great. Thanks, guys. That's all from me.

Operator

We'll take our final question from Jeffrey Bernstein with Barclays. Please go ahead.

Jeff Priester - Barclays - Analyst

Thanks, guys. This is Jeff Priester on for Jeff Bernstein. First, Greg, kind of if I look at average weekly sales, you guys have kind of gotten back to your 2019 levels despite significantly lower advertising and promo expense. So longer term, how are you kind of thinking about when to put that advertising and promo back into the business? How you put it into the business? And whether it's actually necessary to put it back in the business at all? And then I have a follow-up.

Gregory S. Levin - Chief Executive Officer, President and Director

Yes. Great question. So I think there's a couple of ways to look at it. We wouldn't put it back into the business really until we're fully staffed, just when we think about it in the very traditional sense. It makes no - it just doesn't make, I guess, again, using the word, any sense to all of a sudden go out there and do a lot of promotions and marketing and advertising if restaurants are only 60% or 70% or 80% staffed, because we're not going to be able to drive the incremental sales for that additional marketing to make sense. So that would be my first thought about it when you think about the timing.

Secondly, and I think this is - and I'll let Kevin probably talk to this as well. As we've been able to learn more and more about our guests and some of the projects that we've been doing, and we continue to build out our guest database where we can do more personalization in digital and social and engage with the guests on a one-on-one basis. I think our level of marketing might be less dollars because it's more efficient when you can do it more digitally and reach to a guest. But it's also probably going to be a little bit more of a one-on-one basis versus what we've seen in the past. And Kevin is really an expert on this. I'll let Kevin kind of talk through some of this.

Kevin E. Mayer - Executive Vice President, Chief Growth and Brand Officer

Yes. Thanks, Greg. It's a segue. We have certain restaurants that Tom mentioned that are already staffed at decent levels. And we're able to go in right now and actually put marketing around those restaurants. We can be very localized with today's tools and the digital marketing, what we can do with personalization on our website and geotargeting. So we are doing some of that. But as Greg mentioned, what we can do within our loyalty program, within our channel messaging, whether it be e-mail marketing, SMS marketing, we can go almost at the guest level. So we're doing a little bit of both. We're looking both geographically around restaurants that are ready to take the marketing. And secondarily, guest segments who are back in market. I mean, we can actually target guests that we know are in market today looking for restaurants. But I will say that the last part of your question, we've seen historically very strong response from our guests to promotions, to brand marketing around our stronger assets like our daily browse specials. So we look forward to getting back in the market one day where we can kind of let loose the marketing channel again and really push some of the great things that drive our guests back in restaurants at the national level.

Jeff Priester - Barclays - Analyst

Great. And then finally, Tom, just the construction industry is facing all of the same challenges the broader economy is with labor shortages and supply chain issues. So how should we be thinking about capex for those eight units in 2022?

Gregory S. Levin - Chief Executive Officer, President and Director

Yes. So this is Greg. Let me address it to Tom's standpoint. But one is, we feel good about the eight units, and we always worry about our general contractors being able to deliver on that point on the shortage from that standpoint. But right now, we have seen historically higher costs than what we were building restaurants for two or three years ago, which were somewhere around $5 million on a gross basis. Today, I want to say they're more in the $5.6 million, $5.8 million range.

Tom A. Houdek - Senior Vice President and Chief Financial Officer

Yes. Yes. I mean I guess I would add to that is really what's helped us navigate all these issues, and you're absolutely right, that we've seen in the commercial construction business, the same kind of supply chain issues. But our solid track record of consistent growth and a great base of contractors has helped us offset a lot of those supply chain issues.

Jeff Priester - Barclays - Analyst

Great. Thanks.

Gregory S. Levin - Chief Executive Officer, President and Director

You're welcome.

Operator

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BJS RESTAURANTS INC

Q3 2021

Earnings Transcript

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