Gregory A. Trojan - BJ's Restaurants, Inc. Rana G. Schirmer - BJ's Restaurants, Inc. Gregory S. Levin - BJ's Restaurants, Inc..

Will Slabaugh - Stephens, Inc. Jeff D. Farmer - Wells Fargo Securities LLC Matthew Kirschner - Guggenheim Securities LLC Nick Setyan - Wedbush Securities, Inc. Chris O'Cull - Stifel, Nicolaus & Co., Inc. Mary L. McNellis - Robert W. Baird & Co., Inc. Sam Hirsch - William Blair & Co. LLC.

Good day, everyone, and welcome to the BJ's Restaurants Incorporated First Quarter 2018 Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Greg Trojan, Chief Executive Officer. Please go ahead, sir..

Thank you, operator. Good afternoon, everyone, and welcome to the BJ's Restaurants' fiscal 2018 first quarter investor conference call and webcast. I'm Greg Trojan, BJ's Chief Executive Officer, and joining me on the call today is Greg Levin, our President and Chief Financial Officer.

We also have Greg Lynds, our Chief Development Officer on hand for Q&A. After the market close today, we released our financial results for the first quarter of fiscal 2018, which ended Tuesday, April 3, 2018. You can find 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 Greg Levin will provide a recap of the quarter and some commentary regarding the balance of fiscal 2018.

And after that, we'll open it up to questions. So, Rana, go ahead, please..

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 result, 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, April 26, 2018.

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..

Thanks, Rana. As I mentioned on our Q4 call in February, we were encouraged by our positive sales and traffic trends, which we started to see in September of last year and continued to build through Q4 and into the early part of 2018. These positive trends actually accelerated as Q1 progressed and have extended into the first few weeks of April.

For our fiscal 2018 first quarter, comparable restaurant sales and traffic increased 4.2% and 0.4% respectively, reflecting our progress in driving sales through a combination of positive traffic and healthy check growth.

As expected, the shift in the timing of the Easter holiday impacted Q1 sales near the end of the quarter, but benefited April sales and the start to Q2.

BJ's first quarter sales outpaced an average of Knapp-Track and Black Box by over 370 basis points, driven primarily by guest traffic where we saw an average differential versus the industry of 280 basis points.

As a result, our solid Q1 sales marked another period of outperformance versus the industry and we generated some of our largest market share gains in several years.

Our strong first quarter sales and traffic metrics drove solid improvements in overall profitability as we grew net income and earnings per share by approximately 52.1% and 59.5% respectively before the effect of the new accounting standard and tax benefit, which Greg will review in a moment.

Overall, the first quarter results highlight how positive sales leverage together with our ongoing cost efficiency efforts enabled us to offset ongoing labor and other cost pressures.

While we are pleased with BJ's strong start to fiscal 2018, to achieve our goals for the year, we're focused on continuing to drive guests into our restaurants at guest check levels, which enable us to grow profitably in the face of several inflationary pressures.

As we've discussed with you for well over a year now, our sales building platform is built upon menu innovation with our slow roast offerings playing a major role, outfitting our servers with handheld ordering devices, taking advantage of our significant off-premise opportunity, and engaging our new and existing loyalty guests with a simpler yet more powerful rewards program.

I won't go through each of these initiatives in much detail as we did so on our last call as I was laying out this year's plan, but I want to call out a few important updates and then review several other factors I believe are contributing meaningfully to our sales momentum.

First, all of our key needle-moving initiatives continued to play material roles in driving sales. Our off-premise business grew over 30% in the first quarter, and finished Q1 at 7.5% of sales, which is about 150 basis points higher than a year ago. All of that is coming from incremental delivery.

We continue to view large party take-out as another significant opportunity for us and we're working on growing this part of our business. Slow roast continues to play a big role in check and traffic gain, particularly on the weekends when our prime rib entrée is available.

We are several weeks into the national launch of our new loyalty program and we continue to see double-digit increases in loyalty sign-ups, as well as similar increases in reward redemptions.

Our Daily Brewhouse and Happy Hour Specials are building sales in their respective day parts, and importantly have added another reason for some of our more value-conscious guests to visit BJ's.

These everyday value initiatives along with our improved loyalty activity have allowed us to pull back on both the frequency and depth of what I would describe as some of our programmatic dollar-off discount offers. This has also allowed us to fund some bigger idea promotions, or what I think of as promotions with a purpose.

Our marketing team has done a great job of timing offers with certain calendar occasions and making them PR, social and word-of-mouth worthy. Some recent examples which I think have played a role in our traffic trends include our decision last October to launch Pizookie Awareness Month, and sell our iconic desserts for $3.00 all month long.

We took our Buy a Hero a Beer program in November and unleashed the power of our generous guests to buy tens of thousands of our veterans a free beer on Veteran's Day and through the entire rest of the month. Recently, we sold mini pizzas for $3.14 on Pi Day and made deep-dish lovers of 39,427 guests who came in to our restaurants that day.

Several weeks later, we drove huge awareness of our delivery capabilities with our partners at DoorDash by offering free mini pizzas for those choosing delivery. Last but not least, last week, we celebrated one of our Free Pizookie Day countdowns where we spread the incredible tastes and textures of warm Pizookies throughout the land.

It's important to note that each of these promotions with a purpose drove excellent overall comparable net sales growth. And at the same time, even more importantly, these promotions generated positive goodwill and awareness of our brand from substantial earned digital, social and conventional media coverage.

Also, we've been able to execute our promotions this year at a lower cumulative discount to gross sales than a year ago.

Our needle-mover initiatives and marketing programs aside, slowing down our unit growth and letting last year's major implementation projects settle in has given our restaurant managers the opportunity to focus on overall fundamentals, our team members and our guests, all of which have driven sales efficiencies and earnings growth.

Along with our needle-moving initiatives, the state of the consumer in overall economy has been a tailwind, which forecasts suggests will remain positive for the short- and medium-term.

I think the most important microeconomic factor is data we've seen showing that middle-income consumers are finally starting to spend at rates we would expect in an economic recovery. This is helping improve restaurant traffic everywhere, and we are a key beneficiary. We continue to be very pleased with our new restaurant openings and pipelines.

We opened in Michigan in December, and just recently in Warwick, Rhode Island. Both are new states for us, and both restaurants are exceeding our sales expectations to-date.

The success of these restaurants, as well as other successful new market introductions in South Carolina, Pennsylvania and Indiana continue to reaffirm our optimism around the significant amount of white space for the BJ's concept. With that said, our development team is busy building a solid pipeline of new restaurants for 2019 and 2020.

A good start does not guarantee a successful finish, and we're working as diligently as ever to generate more brand awareness, trial and positive guest experiences that will allow us to grow our business every day.

Our successful sales-driving initiatives, coupled with some powerful awareness-driving marketing and generally better economic tailwinds, has set us up to have a very successful and profitable year. Now, I'll turn the call over to Greg to add some detail on the quarter, and further comment on the outlook for the remainder of the year..

All right. Thanks, Greg. Before we get into all the details of the quarter, let me go through the effects of the accounting changes and the tax benefit which, when netted out, amounted to about a $0.03 benefit to our quarterly earnings per share.

As we noted in today's press release, we adopted Accounting Standards Update 2016-10, which required us to change the way we account for our loyalty program, and required us to reclassify our gift card breakage income from other income on our consolidated financial statements up into revenue.

As a result of ASU 2016-10, we deferred $1.1 million of revenues until those loyalty points are redeemed in the future. We also recorded approximately $600,000 of gift card breakage in revenue for Q1 2018, which historically is recorded in other income on our financial statement.

As such, you'll see on our income statement that our other income line for the first quarter of 2018 shows an expense of $100,000 compared to income of $785,000 in last year's first quarter. That difference is a result of the gift card breakage income now being recorded up in revenues versus last year where it was recorded in net other income line.

All-in, the effect of this Accounting Standard Update in the first quarter of 2018 is roughly a $0.02 negative impact to net income per diluted share. This new accounting standard did not change the way we calculate our comparable restaurant sales.

So, our comparable restaurant sales at 4.2% is consistent with the way we have always calculated comparable restaurant sales. There is a full reconciliation in our press release of the impact of this new accounting standard on our quarter one 2018 results.

Now, besides the new revenue recognition accounting standard as we noted in today's press release, our Q1 2018 tax rate was significantly impacted by an excess tax benefit from stock option exercises.

Excluding this benefit, our tax rate would have been around 9% for the first quarter, which would have resulted in net income and diluted net income per share of $13.5 million and $0.65 respectively, which amounts to a $0.05 benefit for the earnings per share.

So, as I mentioned, these two items impacted our quarterly earnings positively by about $0.03 per diluted share. Aside from these two accounting items, we had a very strong quarter. Our total revenues increased 8% to $278.5 million, driven by our 4.2% increase in comparable restaurant sales and a 5% rise in operating weeks.

And, as Greg Trojan mentioned, our comparable restaurant sales increase was driven by positive guest traffic of 0.4%, and average check growth and positive incidence rates.

With Easter falling on the last weekend of the quarter, our traffic was negatively impacted by approximately 30 basis points, as we were pacing at a positive 0.7% in traffic prior to Easter weekend.

From a monthly trend perspective, comparable restaurant sales improved throughout the quarter with March being the strongest month, which is pretty consistent with the data reported by Knapp-Track and Black Box. Looking below the top line, our cost of sales was 25.1%, which was down 30 basis points compared to last year's first quarter.

The decline reflects a combination of menu pricing, less discounting as Greg Trojan mentioned compared to a year ago, and lower than anticipated commodity costs, primarily in dairy, seafood and produce.

Labor of 36.1% for the first quarter rose 30 basis points from a year ago due to higher restaurant incentive compensation based on our strong quarterly performance, and higher workers' compensation cost as a percent of sales.

However, our strong comparable restaurant sales drove a 10 basis points decline in hourly labor as a percent of revenues, despite an average increase in hourly wages for the quarter of around 4%.

Operating and occupancy cost decreased 30 basis points to 20.6% from last year's first quarter, also reflecting the operating leverage gain from our Q1 comparable restaurant sales growth. Included in operating and occupancy costs is approximately $5.2 million of marketing spend, which equates to 1.9% of sales.

Excluding marketing, our operating and occupancy costs for the first quarter averaged approximately $20,400 per restaurant operating week, which is up about $400 compared to last year. This increase is primarily due to delivery fees and higher property and general liability insurance.

General and administrative expenses of $15.1 million were within our expectations and decreased by 10 basis points to 5.4% of sales, compared to the same quarter last year. In terms of capital allocation, we continued to use our strong cash flow from operations to execute our expansion plan while opportunistically repurchasing shares.

Total capital expenditures for the first quarter was approximately $14.1 million, and we continue to expect gross capital expenditures for fiscal 2018 will be in the range of $50 million to $55 million. During the first quarter, we allocated approximately $5.6 million to purchase 135,000 shares of our common stock.

Since the authorization of our initial share repurchase program in April of 2014, we have repurchased and retired approximately 9.5 million shares of BJ's stock for approximately $363 million. As of the end of the first quarter, we had approximately $37 million available under our current share repurchase authorization.

Additionally during the quarter, we returned approximately $2.4 million to shareholders through our quarterly cash dividend. With regard to liquidity, we ended the first quarter with approximately $28.7 million of cash and $158.5 million of funded debt on our $250 million line of credit, which is in effect until November 2021.

Now before we open the call up to questions, let me spend a couple of minutes providing some commentary on our outlook for the remainder of fiscal 2018, and specifically, the second quarter.

All of this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the Securities and Exchange Commission. As Greg Trojan noted in his comments, the sales initiatives we implemented in 2017 continue to resonate well with our guests.

Our comparable restaurant sales are around positive 6% for the second quarter to-date. This, of course, is inclusive of the positive impact of Easter weekend moving into Q1 of this year from Q2 last year, and some pretty strong days around our Free Pizookie Day and free pizza delivery day, again, as Greg mentioned.

Therefore, adjusting for the large benefit we saw from Easter flipping to Q1 of this year, and for the large marketing event, recent comparable restaurant sales are trending in the mid 3% to 4% range. With regards to restaurant operating weeks, we are looking at approximately 2,582 weeks in Q2.

And for those of you building your models, I do expect the new accounting standard for revenue recognition to negatively impact our total revenues for the second quarter by about $1.5 million. This is slightly higher than Q1 as the new loyalty program began February 1. So, Q1 only had two months of impact from the new program.

Moving on to the rest of the P&L, I would expect cost of sales to be in the low- to mid-25% range for the rest of this year, based on an overall commodity basket increase of around 0.5% to 1%. This is up slightly from Q1's trend as we have seen an increase in some commodity items.

Also, in the second quarter, we tend to have higher menu mix for the celebratory timeframe from Mother's Day in May, and Father's Day and graduations in June. Right now, we have locked in about 60% of our commodities for fiscal 2018. With regard to labor, I still expect total labor to be around 36% for the full year.

Specifically in Q2, I would expect labor to be in the mid- to upper-35% range. We are targeting operating and occupancy cost to be around 21% for the second quarter, and that's going to include about $6 million in marketing spend.

Please remember that both labor and operating and occupancy cost as a percent of sales is highly correlated to weekly sales averages and comparable restaurant sales growth. Our G&A expenses for the second quarter should be in the $15 million to $15.5 million range as we expect total G&A for fiscal 2018 to be around $61 million.

Our pre-opening costs should be approximately $1 million for the second quarter and that's based on two planned new restaurant openings plus some pre-opening costs for restaurants that are expected to open later this year.

I expect our tax rate in the second quarter to be in the 11% to 13% range, which should be more in line with our annual effective rate less any discrete items. Our diluted shares outstanding will be in the low 21 million range for the quarter.

And in closing, I just want to mention that we continue to be pleased with the progress we have made over the past 12 months based on our strategies to reinvigorate the top-line, while remaining disciplined in managing cost and improving efficiencies but there's still a lot more to be done.

Our strategy continues to be predicated on delivering a higher quality, highly approachable, polished casual dining experience to our guests.

We will continue improving our strong value proposition as a brand, creating more unique and innovative menu offerings, driving productivity and restaurant efficiency, while ensuring our gold standard levels at guest service and hospitality.

These core strengths have enabled BJ's to gain market share and outperform the industry in terms of traffic and sales trends, and have been fundamental to our measured expansion and long-term bottom line growth.

In closing, our sales driving initiatives and focus on productivity and efficiency, combined with a balanced approach to new restaurant growth are fundamental to our near- and long-term operating success.

These factors coupled with prudent management of our capital structure and capital allocation policies have returned capital to our shareholders as a proven formula for sustained long-term financial growth and a further appreciation of shareholder value.

We remain confident that the plans and initiatives we have in place have established a solid foundation for further success as we continue taking market share in the casual dining space. This concludes our formal remarks. Operator, please open the call up for questions..

Thank you. And we'll go to our first question from Will Slabaugh with Stephens, Inc..

Yeah. Thanks, guys, and congrats on the quarter. I wanted to ask in specific about the Brewhouse Specials and the slow roast menu on the performance there and if you talk about maybe how they're mixing in the first quarter and then so far this quarter versus what you've seen in the past..

Well, I'll try and take that. I don't have exactly where they are from an incident standpoint. But what I would tell you, and we talked about this before, is they have really helped drive mid-week traffic in our business. Things like the 50% off large pizza really drive people into BJ's on Monday. We also use that for off-premise as well.

$3 Pizookies work really well. And since we've put that in place, I would tell you that all of those items have mixed up for our business. And really, I think the thing that we've seen in our business is because we don't have a lot of marketing dollars out there that these things tend to gain traction over time.

I know you followed us for a while and we rolled these out really about a year ago going into really the end of the first quarter of 2017. And at that time, they started off probably a little slower and have continued to really gain traction. And while I don't have the actual incident rate there, they're doing well for us now.

What I would say is our overall mix has been negative because they are lower-priced items. And that moves that mix down a little bit. But they're making up for it on an incident rate in the sense that we are selling more Pizookies today than we've ever sold from that standpoint. Things around our beer incidents are helping with the $4 beer.

So, we're seeing higher incidents offsetting the mix in our business..

And Will, I think you're also asking about slow roast. I'd say same is true of slow roast in terms of continuing the strong momentum that we really saw early on. But we're seeing some of the better Sundays than we've ever seen.

We had a really nice comparable Easter over Easter on a comparable day perspective, because we sold just so much prime rib and grossed some nice check and a lot of happy guests as a result. So as we're even lapping the intro of those products, they are more than holding their own. We're very pleased with that momentum..

Got you. And I want to follow up on off-premise, if I could. Could you give the growth rate you saw on off-premise this quarter and talk about sort of what you saw both from a to-go standpoint and then also any update on delivery would be great..

Yeah. I think we saw about a 30% increase in off-premise in aggregate for the quarter. And as I mentioned in my script, all of that, Will, is coming from delivery. We're actually seeing a little bit of cannibalization and check degradation in take-out as a result of delivery and the wider swathe of online orders coming in on take-out as well.

I mean we still think there's a huge opportunity in large party take-out. We're still working against that, but really the growth is coming from delivery at this point.

Got it. Thank you..

Welcome..

Our next question comes from Jeff Farmer with Wells Fargo..

Great, thanks. Good afternoon, guys. One of your peers, I think it was yesterday, was just saying that they're seeing casual dining sales stabilize with lower same-store sales volatility across not only parts of the country but also some day parts, week parts as well.

Sounds like in terms of your commentary, you guys might be seeing something similar, but do you think that this stabilization can persist as we move forward across the segment?.

Yeah. I think in terms of stabilization, we're seeing good growth. It's not coming disproportionately from one part of the week. I think the trend that we're seeing, dinner, even late-night, and mid being stronger than lunch is continuing in that sense, Jeff.

But we're seeing strength geographically in that it's well-distributed around the country and throughout the week. We see probably a little bit more of the – I don't know whether I'd call them ups and downs, but the variability because of Brewhouse Specials versus the check ring of slow-roasts, which we see more on the weekends with prime rib.

But we know what's driving that. So I wouldn't really call that variability, but we are seeing good consistency in terms of the strength of the business, if that's really your question.

In terms of sustainability, look, I think it's anybody's guess to some point of view, but when you look at the fundamental economic indicators and, as I mentioned in my remarks, I actually think we were in the past, questioning of where the middle-income consumer was in this recovery.

And if you look at some of the credit card data that we've seen which, actually, for the first time, I believe it was in Q1 of this year, but it was fairly recently, you saw that middle-income consumers actually start to outpace the other income segments in terms of spending growth.

And that's obviously the first time we've seen that in a long, long time. So I think, as long as that continues, then I think that there's no reason to believe it's not in the short- to medium-term. I think that's going to help us all..

All right. That's helpful. And just two other quick questions, so a few years ago, competitive encroachment was a fairly frequent conversation. Seems like that's completely gone now in terms of talking about your business and then current menu pricing, if you can let us know what that is..

Yeah. I think completely gone are strong words. I mean, we still see....

A competition..

Yeah. Particularly on a regional basis, from either strong regional players or smaller folks here. I think, in aggregate, the good news is, and I think what you're referring to, Jeff, is we're seeing the numbers for the first time (29:22) is overall net contraction in the number of restaurants and particularly in casual dining.

So when you add it all up – and interestingly, the data we've seen shows that most of that contraction is coming from mom-and-pop and non-chains. And we look at the contraction of some of the major players of shutting restaurants and some of these older concepts completely going away as being big news.

But most of the contraction is coming from mom-and-pops, which I think is interesting. So I think that's going to continue to help. So in terms of the pressure on the business this year and what we're looking at today versus two years ago or three years ago, it's definitely subsided..

Yeah. And in regards to kind of pricing and how we started to look at it with Brewhouse Specials and other things. I think the best way to think about it, Jeff, is our average price is up about 3.2% or so in this first quarter, which is a combination of pricing mixing down on Brewhouse Specials, mixing up on slow-roasts.

Our incident rate, so our attachment rate, if you want to think about it that way, was up about 0.5%. So that drove kind of the 3.8% increase there in kind of our business, and then the 0.4% of traffic. And, frankly, the 3.2% was a little bit higher than what we were expecting.

I think we had talked about it at the end of the fourth quarter that we were expecting an average check of around 2.5% and a little bit higher. I think some of the slow-roasts and other things have really helped drive that average check up. And I think that's probably something that we're thinking is probably consistent going into Q2..

All right. Thank you..

And, Jeff, the incident rate, the nice thing just on the incident rate elements of this and some of the things we're working on, and we don't talk about quite as much, but we're seeing add-on sales.

Certainly handhelds are helping us do that, but our appetizer attachment rates and our dessert sales are some of the best that we've seen in a long time, if ever, and so between desserts and the snacks and small bites innovations we've done around appetizers as well and then the benefit of the (31:48) incident rates increasing with handhelds.

All of that's helping add to those incident and attachment rates..

Our next question comes from Matthew DiFrisco with Guggenheim Securities..

Hi. This is actually Matt Kirschner on for Matt. Thanks for the questions today. I just have kind of a modeling question and then I was hoping to discuss the digital and delivery metrics a little bit further. But, obviously, you were able to kind of hold the labor line pretty flat year-over-year.

Was there anything in particular that happened or some practices that you're putting in place? How should we think about that through the year? I think you said 36% for the full year.

But is there anything that you're putting in place that you have confidence 4% wage inflation couldn't disrupt that?.

Matt, it's a great question. I think what we've got is really, without getting into all the specifics, some of it really just comes down to the efficiencies that we're gaining over the prior year. So when we think about this year versus last year, last year, as Greg Trojan mentioned kind of at the end of the last commentary, we rolled out handhelds.

And that's driving attachment rates or incident rates for us. But handhelds are challenging. We rolled out the slow roast ovens. All of that resulted in a lot of training hours and additional learning hours.

As we've been able to work through that, we've been able to stabilize our hours a little bit and gain some of the efficiencies from that perspective. And I think that's where we've been able to hold the line on hourly labor, despite some of the increases that we're seeing.

And then kind of to your second point, comp sales are going to play into that number, obviously, from a percent of sales perspective. We're always going to do anything we can to be as efficient as we can. But, ultimately, we've got to take care of our guests.

So if we can take care of our guests and drive the comp sales, I think we have the ability to hold the line on labor, which will be challenging. But that being said, I think we've got some ability to go over some of the inefficiencies from last year that will give us a little bit of a tailwind for 2018..

Okay. And then just on the loyalty.

Do you have a count on the number of members in the program now?.

We may have....

I don't....

I don't know if we have that in front of us from that standpoint. We didn't bring that in there. We're seeing some nice increases there. I just don't have that in front of us in regards to what that total number is..

Understood. I think in the past you've mentioned it was maybe roughly 3% of sales.

Is that still fair?.

What we said is mid-to-high teens..

Yeah..

Oh, I'm sorry about that..

As far as a percent of sales or percent of check, it's somewhere in kind of mid-to-high teens..

Understood. Maybe I was thinking of the off-premise for that line..

That's fine..

Okay. Thanks for the questions, guys..

Just the general commentary on loyalty I'd make is we referenced that we know that it's one of the things helping the momentum. But we are clearly seeing a higher rate of sales growth among loyalty members than we are non-loyalty, given this new program which is something that we think is a good thing..

And you said delivery was a driver kind of to the comp and off-premise business.

Any demographic changes in the customer? Obviously most people will report higher average check, but any kind of things worth notable even in the day parts?.

We don't track demo differences from a guest demographic perspective, from a check. What we've said is it's about equal to the check of our on-premise check size.

So we give up a larger liquor mix than many in our competitive group there and largely so we think a flat guest check we have an opportunity to grow, but it's not hurting check from that perspective. And the other comment I'd make is, couple is, it is as strong across our geographies in a more uniform way than I would have expected.

And it's not as concentrated in high urban, more dense markets than lack thereof. I think we're seeing it in all the markets do really quite well. Of course, there's some more than others, but it's less disparity there than I would have anticipated, which again, I think is a good thing.

It shows the efficacy of delivery and off-premise across all of our markets. So I think we remain there's a lot of room to grow still in that area. The other thing I would add that I think is a fundamental question is, is it going to cannibalize dine-in? And I continue to saying the data bears this out that we see very, very little cannibalization.

I mean I don't think it's possible or very, very difficult, let's say, without fundamental research. We can't tell by transaction data if we're seeing any, but I think the closest we could come is we've run a regression around the correlation between off-premise comp sales behavior and on-premise comp sales behavior.

And we actually see almost literally a zero correlation between the two. In fact, it's slightly positive, meaning where we have higher off-premise sales, we actually see higher on-premise growth. So, again, just to reiterate, it's not meaningful from a statistical perspective.

But all that says is we continue through our data that we have is don't think that there's meaningful cannibalization of dine-in, which doesn't surprise me..

Thanks for the color, Greg, and congrats on the great performance..

Thank you..

Our next question comes from Nick Setyan with Wedbush Securities..

Hi. Thank you and congrats on the incredible numbers. Greg, I know that you've been talking about price a little differently over the last couple of quarters. But if we do something like a mid-2s menu price increase, your mix, or maybe a combination of mix and incidence, is something like the best since 2011.

Is that kind of the right way to think about it? I guess, sequentially even, what's driving that? And to what extent can we actually see that continue that type of – that's nice you don't want to break it out.

At least talk about maybe the average check and what we should think about and maybe sustain that into sort of three plus range going forward..

Yeah, Nick. First of all, to your point in general. We were, frankly, a little bit surprised on the increase in average check as well. And that's why the comment in the first quarter was around 2.5% versus saying our average price net in the mix and so forth and they're being at the 3.2% range. In regards to continuing going forward, we don't know.

I would tell you that the way that things rolled out last year, I think we've got some benefit over the next couple quarters. We really started to see I think momentum on everything we've done, really, towards the fourth quarter of last year or fourth quarter of 2017. So we'll have to see as we go into that how that plays out.

That being said, we will continue to work on other items in slow roast and other things to give us some ability to maybe get average check up there. We've also got a couple of things that we're testing in regards to lunch specials and other things for different areas of our business to work on where I think we've got opportunity.

That's probably the best I can give you. I think as we start thinking about how our business has played out, well here, let me take that back a little bit.

The other thing that can probably give us some benefit, and Greg Trojan mentioned this, is we're finding better efficacy in different ways to promote our business that haven't been as discount-sensitive in the past. In the past we might have tried some things like BOGOs and other things that have actually lowered our average check.

And as our new Daily Brewhouse Specials have worked for us and as well as the changes in the Happy Hour, we haven't had to be as discount-centric in there and that's probably helped elevated that check as well. So I think we still have that momentum going for us coming through 2018..

And, Nick, just the other thing I would add is, we have a bit of a counter-balance in terms of what we're rolling over from a check perspective, and by that I mean, Brewhouse Specials and slow roast rolled out essentially in very similar time frames, so we get the benefit of beginning to lap the negative check impact of Brewhouse Specials, but we get the positive – or the flip – we get the positive of lapping the negative impact of Brewhouse Specials.

But we've begun lapping over the benefit of slow roast, right. So those two should counteract each other reasonably well and given the momentum of slow roast and the discounting, we think we're still in that same ballpark of our target even though we exceeded it of 2.5% to 3%, I think is a reasonable expectation. So within that range, we'll see..

Got it. And in terms of delivery, it sounds like it's something like 1.7% or so and it's based on the past that you guys gave us.

And in terms of the sales contribution, why can't we see things like the free pizza delivery and some of these other things that are driving the 6% comp, with the exception of obviously the Easter shift, why can't we see those types of promotions on an ongoing basis?.

That's a good question, yeah..

I'll give you a quick answer on some of those things. The first is we're working on those things. The most difficult is we have third-party delivery partners and they've got to be able to have the flexibility in their systems to be able to do it as well.

So we obviously have the flexibility to reduce our menu price to X or do this type of offer within our restaurants.

We don't necessarily have that flexibility with some of our partners to be able to actually say, "Oh, we can do that on our website." So when you order through a Grubhub or a DoorDash or some of these waiter app, Waiter.com companies, they don't have that same flexibility.

So that's something that we continue to work with them on and frankly, with such a great IT department that we have here, we can work on some of those APIs and other things, especially the fact that we can use our app for delivery.

So that's probably the more technical challenge in regards to having them be able to do some of the same things we do within the dine-in part of our business..

But, Nick, just in general, that is at least hopefully a short-term limitation in terms of delivery. But, look, we love what, in general, this category I refer to as promotions with a purpose is doing for our business and being able to concentrate our efforts. And like the Pi Day promotion, et cetera.

Free Pizookie Day has really been even a long-term help to our business and drive Pizookie incidence. So the intention is for you to indeed see more of that from us because the value of the earned media that we derive from that and the goodwill is part of unlocking this awareness potential we have or opportunity we have, as a concept.

And so we're really liking the impact that those kind of promotions are having for us. And our goal is to do more..

Then, just lastly, what is the composition of delivery in terms of mix? Is it across the board in terms of what you offer on the menu? Is it primarily pizza? I'm even seeing offers around alcohol and wine.

Is there some data you could give us around that? It just feels like, given what you sell, you might have an opportunity that's a little bit bigger than some other casual diners with respect to delivery..

Yeah. No. We deliver just about the entire menu, with very few exceptions. And you have hit the nail on the head. We do think it gives us a real advantage in that when you're delivering for a larger group, even if it's a family size or an office, there's something for everybody on our menu. And you can cover all those bases in one order. So, yeah.

We love the flexibility that our menu gives us for the delivery occasion..

Thank you..

And next, we'll go to Chris O'Cull with Stifel..

Thanks. Good afternoon, guys..

Hi, Chris..

Greg, I apologize if I missed this, but can you guys quantify the cost impact those sales initiatives had on margin last year, and kind of remind us when they really started hitting the P&L?.

We haven't talked about that specifically. I would, frankly, have to get back to you a little bit on that. In general, most of them rolled out and hit the impact a lot in Q2. I would say in Q3, we were really trying to get the efficiencies around the handheld. So you saw it more in labor.

You did see a little bit of the higher cost of sales go through there as well. I just don't have it in front of me, and I don't recall exactly how many basis points there were in labor or in cost of sales for those things. In Q1, there wasn't as many. Really it was coming through in Q2 and Q3 of last year..

And one last modeling one, would you quantify the impact of the higher workers' comp cost for this quarter and then the incentive comp as well? And then I had a follow-up..

Well, I think the best way to think about it was, we're up 30 basis points. And we said hourly labor, we were able to leverage. I think we really leveraged it like about 10 basis points.

So you've got the incentive comp and the workers' comp kind of making up that difference, fairly even, but probably I'm going to say 40 basis points, I guess, 20 basis points of each..

Okay. That's helpful. And then, Greg, is the company advertising yet on the delivery, the third-party delivery sites or are you just relying on the aggregator search algorithm? I'm trying to get a sense for your visibility on those websites..

We....

A combination..

Yeah..

It's a combination. You do have to pay to play in certain aspects of things with certain of the delivery companies, but when we did a promotion, as Greg said, around, let's call it, the free delivery or the free mini pizza, that we did.

We're doing both our own internal pay, or our pay to get that message out there on a lot of different sites, using a lot of PR. We're also using, obviously, that third-party delivery company is kicking in and putting it at the top there. So it's a combination of things that we do.

We also have in our restaurants just the traditional point-of-purchase type stuff, whether it's on the table, or when you walk in, you might see an A-frame, that talks about the delivery side of things. So it's a combination of things that we are using in regards to the delivery..

Do you pay the same commission? I assume you pay a different commission rate if the orders come to your all's website and are filled through the third-party delivery provider than if a consumer went to their marketplace..

That's correct..

Is that true? Okay. And....

That's true..

Is there opportunities for conversion there?.

Converting the third-party more to our site?.

Right..

We're not saying anything that we don't tell our third-party partners is we prefer them go through our site and our app because we have control over that relationship with that guest and their e-mail address and we convert them into loyalty guests, et cetera, so the answer to that question is yes..

Okay.

Are you able to, as a consumer, sign up or use loyalty points if you just use their marketplace?.

No..

Okay..

Because it goes through our point-of-sale system..

Okay. Great. Thanks, guys..

Okay..

And next, we'll go to Mary McNellis with Baird..

Good afternoon. Thanks for taking the question.

On the Q2 comp, can you just talk a little bit about how you're thinking about the comparison in the balance of the quarter, given, I believe, your year-ago comps decelerated to slightly negative in June last year after tracking positive through April and May? So would it be right to think that the underlying trend can improve a little bit in the balance of the quarter as you lap those easier comparisons? Or just any perspective on how you're thinking about the balance of the quarter would be helpful..

Yeah. I think the best way that we're thinking about it, Mary, is that the trends that we're seeing is taking out Easter and some of the large promotional days that we've done or marketing days, that the trends in the mid 3s or kind of 3% to 4% as we said is more than likely the trend going forward. That's kind of the best way we think about it.

In fact, even if you look at the first quarter here, we were surprised that our trends actual improved as we went over harder comparisons because a year ago in the first quarter we were going over some of our easier comparisons because of the rain in California. And then frankly, we flattened out in March.

And March was a stronger comp over stronger comps from a year ago. So while it tends to feel like we're going over easier comparisons, as we get into the May and June timeframe, we're not necessarily thinking that's going to be the case when we finish the quarter..

That's helpful. Thank you..

Yeah, real quick, I think the other reason for that, Mary, as well is at that time we'll be lapping some of our slow roast, and Brewhouse Specials. So that's why I think it's a little bit more consistent..

That's fair. Thank you.

And then I was just wondering if you could talk at a very high level about how you're thinking about the longer term unit growth algorithms for BJ's from here, now that you kind of have your arms wrapped around the existing base, and maybe just any perspective you'd be willing to provide on what you need to see to reaccelerate that growth.

And maybe how long it would take you to reaccelerate the growth now that you've kind of slowed it down here the last few years..

Yeah. What I'd say in general is we continue to see kind of traffic momentum, most importantly, from our own concept at BJ's level, but also the industry remaining at a healthier place. We're anxious to ramp up our pace of development, and if you use 4 to 6, use 5 as the midpoint for this year.

And the thing I have stressed is we've always focused on opening in a quality way and not taxing our operations capability unduly. So we wouldn't go from 5 back up to 15 or 17. I think the next step function increase would probably be in the 9 to 10 range, and from there, whatever.

But we won't be making that decision until the latter part of this year. But just to give you a sense of relative scale, we could go from 5 to 7 to 8 to 10, but we wouldn't be going from 5 to 15 in one year..

That's very helpful. Thank you very much for taking the questions..

Okay..

And our last question for today comes from Sharon Zackfia with William Blair..

This is actually Sam Hirsch on for Sharon. And can you hear me now? I'm sorry.

Hello?.

Hi, Sam..

Hi. Sorry about this. So my question actually is back to the tax rate. So when I see the full year guidance is roughly 15%, so I see about a $0.10 benefit calculating like that, and I know you called out $0.05 from the equity stock option exercises. So I'm just sort of wondering where the difference is that you're down to 9%..

Yeah. So when we talk about 15%, that was what we thought our estimated tax rate was going to be this year with everything that came around the Tax Act. And I just said in the formal remarks today that we think our rate on a normalized basis is somewhere closer to 11% to 13%, not 15% anymore. So we've brought that down.

And the reason it's lower than where we were thinking the 15% was is we still have other discrete items and we've seen with the higher sales, we've technically been able to see a higher WOTC credit than other credit that we'll get each quarter which generally bring down our rate.

Does that answer your question?.

Yeah.

So just to clarify, so for the second quarter and for the full year, you're expecting it to be closer to 11% to 13% now?.

Exactly..

Got it..

So this first quarter, just the way it played out at the 9%, and then the 11% to 13% will probably put us closer to 11% overall for the full year..

Perfect. All right. Thanks..

You're welcome..

And, everyone, this does conclude today's call. Thank you all for your participation. You may now disconnect your lines..

Thank you, everyone..

Thank you, everybody..