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

Matthew Kirschner - Guggenheim Securities LLC Will Slabaugh - Stephens Inc. Sam Hirsch - William Blair & Co. LLC Chris O'Cull - Stifel, Nicolaus & Co., Inc. Mitchell J. Linhart - Robert W. Baird & Co., Inc. Jon Tower - Wells Fargo Securities LLC.

Good day, ladies and gentlemen, and welcome to the BJ's Restaurants Incorporated Second Quarter 2018 Earnings Release and Conference Call. At this time, I'd like to turn the call over to Greg Trojan, Chief Executive Officer. Please go ahead, sir..

Thank you, operator, and good afternoon, everyone, and welcome to the BJ's Restaurants' fiscal 2018 second 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, and Kevin Mayer, our Chief Marketing Officer, on hand for Q&A. After the market close today, we released our financial results for the second quarter of fiscal 2018, which ended on Tuesday, July 3, 2018. 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'll 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 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, July 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. We're pleased to report that in Q2, our sales momentum accelerated meaningfully following our strong start to the year in Q1. Comparable restaurant sales and traffic increased 5.6% and 2.5% respectively, once again reflecting our success in driving sales through a combination of positive traffic and healthy check growth.

Second quarter sales outpaced an average of Knapp-Track and Black Box by over 460 basis points, driven primarily by our strong guest traffic levels where we saw an average differential versus the industry of 420 basis points in the quarter.

Our net check growth was approximately 3% in the quarter, driven by an increase in gross check of around 2% and less discounting benefiting net sales by approximately 1%.

The continued success of our Slow Roast items, off-premise delivery expansion, and our investment in Daily Brewhouse Specials, and Happy Hour have enabled us to pull back on our level of discounting while driving solid gains in guest traffic.

As a result, our solid Q2 sales marked another period of outperformance versus the industry and we generated some of the largest quarterly market share gains in our concept's history.

These results are a testament to the strength of the BJ's brand and the broad attraction to our unique concept, as well as our team members' continued commitment to deliver gold standard service and hospitality each and every day.

Our strong second quarter sales drove an impressive increase in overall profitability, as we grew net income and earnings per share by approximately 67% and 70%, respectively, before the effect of the new accounting standard and tax benefit, both of which Greg Levin will review in a moment.

These results demonstrate the power of our 200 restaurant management teams and 22,000 team members as they focus on executing our concept shift-by-shift, day-by-day. Their hard work is translating into higher guest satisfaction scores, which we believe is the key driver of setting 42 daily sales records and 23 weekly sales record this quarter alone.

Such growth, together with our ongoing productivity efforts, has enabled us to offset ongoing labor and other cost pressures, as reflected by the strong second quarter financial results.

While we are pleased with BJ's strong start to 2018, we remain focused on pushing as hard as ever by building upon the core sales driving initiatives, which have led to our current momentum.

The positive guest response to our Slow Roast menu items validates it as a key cooking platform, which will continue to yield exciting menu innovation moving forward. Slow Roast entrée incidents hit an all-time high in Q2, well outpacing the strong levels of last year when it was supported by introductory marketing.

Our new menu item pipeline will leverage this success, and is as strong as it's ever been. Our off-premise sales including take-out, large party catering, and delivery, finished the quarter at a run rate of 7.6% of sales. And we believe there's an opportunity to grow this channel by at least another 50% over the next several years.

We also continue to believe that technology will play an increasing role in enhancing our service, hospitality, and efficiency. The BJ's app, our handheld server tablets, and our ongoing website enhancements have been important contributors to our sales growth, operating efficiency, and guest engagement.

We're developing additional technology, which will benefit our guest experiences in and outside of our restaurants, from order taking to food delivery, either to the table or to the home.

Our upgraded loyalty program is another example of our investment in technology that is opening the door for us to make our guests' interaction with our brand more customized and satisfying than ever. In addition, our overall marketing message and media placement is more targeted than ever, which is helping drive traffic across all of our markets.

Lastly, I want to call out an important milestone in Q2 as we celebrated the opening of our 200th restaurant in Albany, New York, not too far from where I grew up. It joins Warwick, Rhode Island and Hagerstown, Maryland in the class of 2018 opened thus far, and represents our continued penetration into the middle Atlantic and northeast.

As those of you familiar with the restaurant business know, opening new locations is a tremendous undertaking, requiring unparalleled levels of teamwork among just about every functional area of our business from real estate and construction to marketing and IT, and of course, operations.

We've learned through the years how to open strong, new restaurants without sacrificing the quality of our existing locations, thanks to the efforts of literally thousands of our team members, large numbers of whom spend weeks and sometimes months away from their homes and families.

Without them, we'd not be as excited as we are about the opportunity before us as we begin our quest to open the next 200 BJ's. As we look forward to our development pipeline in 2019 and beyond, we're highly optimistic about bringing our brand to more new markets.

Although we will establish more definitive development plans for next year as part of our fall planning process, our top-line momentum will likely lead to an increase in new restaurant openings in 2019. As always, we will do so with the quality of our new restaurants taking precedence over the quantity.

This criteria has served us and our shareholders well, and the growth of our operating results over the last several quarters demonstrate the efficacy of this approach.

In closing, I'd like to thank all of our team members across our company for their incredible dedication, hard work, and support in the pursuit of making BJ's a better place for our guests and fellow team members each day.

Thanks to them, we remain one of the industry's leaders in defining a version of casual dining that responds to the needs and desires of what guests want and need today, not the tried and true formulas of years gone by.

So now I'll turn the call over to Greg Levin, our President and Chief Financial Officer, to go through the financial highlights of the second quarter..

Thanks, Greg. Before we get into all the details of the second quarter, let me go through the effects of the accounting change, and the tax benefit, which when netted out amounted to about $0.04 benefit to our quarterly earnings per share. Let me start first with our tax rate.

For the second quarter, our tax rate was 4.9% and this included an approximate $1 million tax benefit from stock option exercises, which amounted to about $0.05 on an earnings per share basis.

Excluding this benefit, our tax rate would have been around 11% and net income and diluted net income per share would have been $15.9 million and $0.74 respectively. The adoption of ASU 2016-10 changed the way we account for our loyalty program.

As a result, we deferred $212,000 of revenue until those loyalty points are redeemed in the future, which equates to an approximate $0.01 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 of 5.6% is consistent with the way we have always calculated comparable restaurant sales over the years.

Taken together, these two items, that is the $0.05 benefit from the tax rate offset by the $0.01 negative impact from the new accounting standard, impacted our second quarter earnings by a positive $0.04 per diluted share.

Our ASU 2016-10 also requires us to reclassify gift card breakage income on our financial statements from Other Income to Revenue. Therefore, we also recorded approximately $216,000 of gift card breakage in Revenue for Q2 2018, which has historically been recorded in Other Income on our financial statement.

As such, you'll see in our Q2 2018 income statement that our Other Income line shows income of only $81,000 compared to income of $266,000 in last year's second quarter. That difference is the result of the gift card breakage income now being recorded in revenues versus last year.

Since this is simply a reclassification between accounts, there is no impact in net income or net income per diluted share. And there is a full reconciliation of the impact of this new accounting standard in our Q2 press release.

Now, putting the accounting items aside, we had another very strong quarter, as measured by virtually every financial metric. Our total revenues increased 8.2% to $287.6 million and was driven by our 5.6% increase in comparable restaurant sales and a 3.5% rise in operating weeks.

And as Greg Trojan mentioned, our comparable restaurant sales increase was driven by positive guest traffic of 2.5% and growth in average check. From a monthly trend perspective, comparable restaurant sales were pretty consistent throughout the quarter.

With regards to the middle of the P&L, our cost of sales was 25%, marking a 120-basis-point decline compared to last year's second quarter. The decline reflects the combination of menu pricing, lower discounting compared to a year ago, and lower-than-anticipated commodity costs, primarily in dairy, seafood and produce.

Labor of 35.5% for the second quarter rose 10 basis point from a year ago due to higher restaurant incentive compensation based on our strong quarterly performance, and higher workers' compensation costs as a percent of sales.

However, our strong comparable restaurant sales drove a 40 basis point decline in hourly labor as a percent of revenues, and this was done despite an approximate 4.2% increase in average hourly wages for the quarter.

Operating and occupancy costs decreased 10 basis points to 20.5% from last year's second quarter, also reflecting the operating leverage gain from our strong Q2 comparable restaurant sales.

Included in operating and occupancy costs is approximately $5.4 million of marketing spend, which equates to 1.9% of sales and is consistent with the first quarter levels. Our second quarter marketing expense was less than anticipated, as certain initiatives and costs amounting to approximately $700,000 were moved to the second half of this year.

I will address this shift shortly when providing the update for the remainder of 2018. Excluding marketing, our operating and occupancy costs in the second quarter averaged approximately $20,800 per restaurant operating week. And that is up about $800 compared to last year, with the increase primarily related to third party delivery fees.

Second quarter general and administrative expenses were $15.9 million, an increase of 20 basis points to 5.5% of sales compared to the same quarter last year. Overall, our G&A expense was slightly higher than expected, and this is due to increased incentive compensation based on our performance in 2018 to date.

Before I get into review of our second quarter capital allocation and expectations for the balance of this year, I want to applaud our operators first for their success in efficiently processing the increased level of guests we saw during the second quarter. Our goal at BJ's is to continually bring more dollars to the bottom line.

As such, despite the inflationary pressures we face every day, and the fact that increased guest counts means increased hours, means increased linen costs, janitorial supplies, and other costs, our operators – who we consider the very best in the industry were able to increase restaurant-level cash flow dollars by 15% on an 8% revenue increase.

We are extremely proud that our teams were able to achieve a truly gold standard level of operating execution in the second quarter while maintaining our commitment to gold standard service and hospitality for our guests.

In terms of capital allocation, we continue to use our strong cash flow from operations to execute our expansion plan while opportunistically accelerating shareholder returns through repurchases and dividends, and maintaining an excellent balance sheet with modest leverage.

Total capital expenditures for the first half of this year were approximately $28.8 million, and we continue to expect gross capital expenditures for fiscal 2018 to be in the range of $55 million. During the second quarter, we repaid approximately $48.5 million of debt, which lowered our outstanding debt balance to $110 million.

We also allocated approximately $1.1 million to repurchase 24,000 shares of our common stock. And we returned an additional $2.4 million to shareholders through our quarterly cash dividends. As a result, we ended the quarter with $19.4 million of cash.

As of the end of the second quarter, we had approximately $35.9 million remaining under our current share repurchase authorization. And we have repurchased and retired a total of approximately 9.5 million shares of BJ's stock for approximately $364 million since the program began in April of 2014.

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. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements, as discussed in our filings with the SEC.

As is evident in our comp, traffic, and average check metrics, our sales initiatives continue to resonate well with our guests. With our fiscal Q2 ending on July 3, we saw a big July 4 benefit in the early part of Q3, and that included a 29% positive comp sales day on Wednesday, July 4.

As you may recall from last year's holiday calendar, the first week of Q3 of 2017 was weak – was a weak one for the industry and was a weak one for us as we were down 4%. So we are getting the benefit from lapping those soft days to start this quarter. Overall, our comparable restaurant sales are around 5% for the third quarter today.

However, as we look out to the rest of this year, our initiatives started to take hold with our guests in the latter part of Q3 as our sales flattened out in September and then turned positive in Q4 last year with a positive 1.6% and a positive 0.7% increase in comp sales and traffic in the fourth quarter.

With regard to restaurant operating weeks, we are looking at approximately 2,600 weeks in Q3. For those of you building models, I expect our weekly sales average to change to be about 100 to 150 basis points below our comp sales, which has been the pattern over the last several years.

Plus, we will continue to have some impact from the new revenue recognition accounting standard. Moving on to the rest of the P&L, I expect cost of sales to be in the low 25% range for the rest of this year, based on overall commodity basket increase of around 0.5% or so to maybe 1%.

This is up slightly from the first half of the year as we are seeing increases in some commodity items. Also, as a reminder, we tend to have higher cost of sales menu mix in Q4 during the holiday timeframe. With regard to labor, we continue to expect total labor to be around 36% for the full year.

Specifically, in Q3, which is our lowest weekly sales average of the year, I would expect labor to be in the upper 36% range, and then come down to the 36% range in Q4. As I mentioned earlier, we moved approximately $700,000 of marketing expense from Q2 to the second half of the year.

As a result, we expect marketing spend in Q3 to be around $6.5 million and around $7.5 million in Q4. Now to put that in perspective, last year's Q3, our marketing spend was only $4.6 million.

A good portion of this increase will be related to media production costs that we will be able to use over the next 12 to 18 months, but for accounting purposes, must be expensed when incurred. Additionally, we will be increasing some marketing spend in some of our newer markets where our brand awareness is low.

As such, our operating occupancy costs in total, in Q3, will more than likely be in the high 22% range, and should decline to the lower 22% range into Q4 as we leverage higher weekly sales averages in Q4 as compared to Q3.

Please remember that both labor and operating occupancy costs, as a percent of sales, are highly correlated to weekly sales averages and comparable restaurant sales growth. Our G&A expenses for the third quarter should be in the $15.5 million range.

Pre-opening costs should be approximately $500,000 in both Q3 and Q4, and that's based on one planned new restaurant opening per quarter, plus some pre-opening costs for restaurants that are expected to open early next year.

I expect our tax rate in the third quarter to be in the 10% to 12% range, which should be more in line with our annual effective tax rate, less any discrete items. And our diluted shares outstanding should be in the low to mid-21 million range for the quarter.

In summary, our focus on creating a great dining experience for our guests through our team members, menu innovation, and everyday value, combined with the effectiveness of our marketing, including our loyalty program, the BJ's app, and a mix of social and traditional media, is expanding the awareness of and strengthening our brand.

With a rock solid financial position, we've applied our growing cash flow to a measured approach to expansion. We've got a great team that have accomplished a lot, though our sights remain on making BJ's the best casual dining concept ever.

As we build the brand and see the strong response to BJ's Restaurants in new markets, we remain confident that we are still in the early innings of growth, and that even with 200 restaurants now opened, we can double in size by prudently and precisely executing on our development opportunity. With that, we conclude our formal remarks.

Operator, please open the call up for questions..

Thank you. We'll take our first question from Matt DiFrisco with Guggenheim Securities..

Hey, this is Matt Kirschner on for Matt. I just had a few questions around the CapEx in 2018 and 2019.

I'm not sure if you're willing to give the 2019 CapEx guidance now, but how should we think about maybe the pace of growth in 2019, given kind of recovery in same-store sales, and some of the operational aspects of business?.

Yeah, Matt. It's Greg Levin. We haven't developed our full pipeline for next year, as Greg Trojan said on his formal remarks, it will increase. I think if you look at the history of BJ's, we've been very measured in regards to how we increase our new restaurant growth. I don't think you would see us go from five to 15 restaurants next year.

It's just something we haven't traditionally done as we want to do it with quality over quantity. So, this year, we've talked about five. I would see that number stepping up into the mid-to-high single digits.

We're going through our pipeline currently and trying to find what we consider to be the best restaurants that we will open up with, again, high-quality growth. So that's really where we are today. The only other thing I would add to that is I think everybody in the industry is continuing to see some increases in construction costs.

It's been challenging, I think, hiring good contractors and subcontractors. So we're always balancing the construction costs and getting the right returns as we grow our business as well..

Understood. And I noticed you did have a pretty significant allocation to the debt this quarter.

Is your plan to continue to pay that down? Or what's kind of the outlook for capital?.

Yeah. Another solid question, and obviously, we're generating a lot of free cash flow. We're always going to take a kind of total shareholder return analysis as we look at our cash flows coming from our business. We felt in the second quarter that it made more sense to pay down debt versus being more opportunistic in share repurchases.

We'll continue to have a combination between that. I think depending on how our multiple goes and our valuation, we'll probably tend to see continued debt pay-down while still being opportunistic in regard to share repurchases..

Great. And then I do have one bookkeeping question. I wanted to confirm the operating week count for 3Q.

Is it 2,602?.

I think I said 2,600, two thousand six hundred..

Understood. Thanks, guys. Appreciate it, great quarter..

You're welcome. Thank you..

We'll take our next question from Will Slabaugh with Stephens, Inc. Sir, your line's open. Please check your mute button..

Yes. Thanks, guys. Sorry about that. So, I had a question on the margins. Those came in quite a bit better than we would have thought, even with a higher comp, especially given what we've seen from you in terms of your peers as off-premises ramped.

So is there something you're beginning to do to help offset some of the lower percentage margin associated with those delivery orders? Or is this just a volume game that maybe you've hit a good level and you're seeing a good penny profit (25:56) flow-through?.

Yeah. Well, I think that the best part of that or probably the most direct part of that is we've been able to leverage cost of sales better this year. I think that really has to do with the fact that we're seeing less discounting, part of our strategy that we talked about this year with things like the Brewhouse Specials.

And I think as we've gotten better on what works in regards to driving our guests, that's probably given us the best leverage. I think if you look at it just from a trend standpoint for last year, we were in the 26%-s. Now we've brought it down to the 25% range.

I think the other side of that is as much as it becomes a challenge for everybody in the industry, when you see wage rates in the 4% range, if we can drive comp sales above 4%, you get a little bit of leverage on some of that labor there. And that's helped us keep the labor line more or less flat.

And then I think as you look at our numbers and look at our operating and occupancy costs by a cost per week, you can see that unfortunately or fortunately, which way you want to look at it. We haven't been able to keep around that $20,000. It's come up and that's due to the delivery.

But because we are driving higher sales and getting that leverage, we were able to bring more dollars down to the bottom-line and it's really that simple.

We've been able to leverage cost of sales because I think we've put in better tactics around the marketing that's resulted in less discounting, and then driving the higher cost of sales in there is leveraging some of that hourly labor, which I think is the challenge in our industry..

Got it. Makes sense. And sort of a catch-all question.

You mentioned a number of things that were helping from loyalty, changes to technology to – I was curious if there were any metrics or stats or anything that would help to – for us to gauge how those changes and improvements are impacting sales at all, whether you're seeing improved frequency from loyalty guests or what have you?.

Yeah. Well, I don't necessarily want to go into the details of all those. One, that it's just frankly it's kind of our internal stuff and the way we look at our business. A couple things I would note, though.

Our loyalty program since we rolled it out, made some changes to our website, we've seen an increase in our loyalty guests both in signups but also as a percent of checks, which has worked really well for us. Obviously, off-premise, you could probably back into some of those numbers. Greg Trojan mentioned that it's 7.6% of sales right now.

I think a year ago, it was 5.7%, so you can understand some of that. And then the items around Brewhouse Specials and Slow Roast are just helping us really from different dayparts in regards to driving frequency.

And then finally, without getting into the details of the numbers, Greg did mention this briefly, we're seeing some nice improvements in our Net Promoter Score. And that's important to us I think for the long-term health of the business.

Now, that being said, I think some of those improvements really come down to the fact that last year at this time, we were rolling out a lot of initiatives. And our operators are really able to settle in, get through the learning curves, and optimize those initiatives.

And when you can give better service and better food together, that's going to grow your comp sales, and I think that's what we're seeing this year in regards to our business..

Gotcha. Thanks and congrats..

Thank you..

We'll take our next question from Sharon Zackfia, William Blair..

Hi. This is actually Sam Hirsch on for Sharon. I just was wondering a little more about the loyalty. Can you actually give the percentage of sales that you guys are at? I think you had said 15% of your sales were coming from loyalty guests, and I just wanted to know what that was now, and then maybe some other details about the customers..

Yeah, Sam. As we just mentioned previously – I think Will asked kind of the same question, and we don't like to get into details in regards to our business from that perspective. What I would tell you is that's correct.

We've talked about in the past our loyalty being in that mid-teen range, and it's been growing since we've rolled out the new loyalty program, I think, and we simplified it. We've made some changes to our website.

All of it has tended to be more sticky and driving more guests into our restaurants, but we would rather defer from where that actually is from a percentage standpoint, both in regards to the number – the percentage from a transaction standpoint and the percent of sales..

Okay. Thanks. Actually, I just have one more. I think you mentioned you were thinking about rolling out some new Brewhouse Specials.

Do you have any ideas around sort of timeline for when you expect to do that, or it would be a gradual rollout testing different items in different regions?.

Sam, we're looking at testing some of those in the last half of this year with an eye towards making any adjustments to the national calendar, if you will, our Brewhouse Specials sometime in the first half of next year if we are convinced that they're additive to – the current Brewhouse Specials are working pretty well, but we like the idea of keeping them fresh and incremental.

So, those ideas will be put into test and, if they're working well, you would see those do – like I said, probably the first half of next year..

Great. All right. Thanks, guys..

Welcome..

You're welcome..

We'll take our next question from Chris O´Cull with Stifel..

Hi. Good afternoon, guys. Greg, based on my math, it looks like you expect the fourth quarter restaurant margin to be flat to down year over year.

Why would that be the case?.

Probably the big change there may be on the marketing side. It's probably the biggest one there.

I think when you think about – I don't know what your – obviously, your details are – when you start to look at it, and you think about where our marketing was in the prior year, it was probably around 2% in Q4, and it's probably going to be a good 50 basis points higher in Q4. Again, it depends on comps.

So that's probably going to be the biggest area there, I think, in the fourth quarter..

Hey, Chris. Just to reinforce....

Go ahead..

I'm sorry. And Greg mentioned this a little bit in his comments. A good bit of that is timing on just where the production costs are falling in the second part of the year. And some of it is us looking at ways to spend some dollars earlier than we have otherwise in some of our newer markets.

Given our overall spending levels here, we haven't had really the ability to turbo charge the natural sales curve in some of these newer, earlier markets.

So we're looking at some largely digital and local restaurant marketing options that we have to see if we can't hurry along that natural comp sales curve that we're seeing in these new markets, but if we can speed up that process, that will be a benefit to us, obviously.

So some of that is, I would call some test spending around the non-traditional market spend that we've had in our larger markets..

And Chris, not to get too specific because everybody's got different models. I'm not quite sure I show margins being completely down on the different models that I'm using here. But depending on where you are from a comp sales or weekly sales average, I could see that..

Okay. And then, just as a follow-up, Greg.

Given the success you guys have had with the new menu platforms and the off-premise channel, how should we think about the sales growth going forward? Is there – should we expect – I know you talked about some new tests with some new Brewhouse Specials, but do you feel like there needs to be another new platform for the menu? Is there a new approach to marketing that you're thinking about taking in 2019 to really try to accelerate the awareness or build the awareness of these things that you've already put in place? How should we think about the sales growth over the next 12 to 18 months?.

What I tried to communicate upfront, Chris, but thanks for the chance to reinforce, is we think there is still a lot of life in what we call our needle movers, or the key sales building platforms that have been clearly working for us recently and well into this year.

So there's still a lot of growth ahead of us in the world of off-premise, just in terms of product development, in leveraging the Slow Roast platform. And I do think part of what we are investing in, and we do have some optimism around spurring some greater awareness on the marketing side, particularly in these less dense markets.

So it's all of the things that are working still have plenty of runway left to continue to drive the top-line for us..

Okay. That's helpful and then...go ahead..

Chris, real quick, the other thing that I still come back to, we talk about this internally all the time, is when you think about the casual dining business, especially around 200 restaurants and the majority of sales coming within the four walls of the business.

We've always said if we can hold on to our guests, and get through mix and pricing and incident rates, we'll be happy. And you start to think about that. That starts to move down comp sales from where we're now in the upper – and where we just finished the second quarter in the upper 5s down to probably more in the normalized 3 percentage range or so.

That would be a number I think we'd be happy with long term. There's always going to be spikes in that, there's always going to be valleys, but as we think about our business long term, that's the way we think about it.

And then, as Greg mentioned, we'll continue to work on a lot of different initiatives to hopefully have more spikes than valleys, but I think long term, that's how we tend to think about our business..

Good. And then, just lastly, you mentioned the sales benefit from server handhelds and I'm just curious if you could quantify the benefit of that and then maybe talk a little bit about how server handhelds have impacted the guest experience and throughput..

We're not going to divide out each of the attributes, but, in general, what we've seen with both operating and financial data, Chris, is it's helping sales explicitly through mostly on the add-on sales. Our app sales and dessert sales are up nicely.

And we attribute a good part of that, probably not all, but a good part of that, to handhelds, including NA beverages.

I think just the speed of which they're getting to the tables, but in the case of NA beverages, they're just getting rung up a higher percentage of the time where it's a lot easier to remember and make sure that those sales get rung in from a point of sale perspective. So there's clear top-line measureable impact from that perspective.

Just as importantly, though, is this speed to the table, which we do measure, and can tell you that we made significant strides in the time that it takes to get that first beverage to the table has been something from a guest satisfaction perspective that's paying dividends.

And then, last but not least, I'd say and, to be honest, it wasn't as much of a part of the rationale explicitly of putting handhelds in place, but we think one of the things that it's also benefiting is the level of engagement in our loyalty program.

Clearly, some of the redesign work that we did in loyalty is driving a good part of that, but there's no question when we observe and see how handhelds makes it easier for the guests and our servers to converse and exchange information relative to loyalty, it's helping us execute our loyalty program in a much more seamless way.

So, look, we said this before, the rollout of handhelds was a rougher journey in the mid to last part of 2017, but we're glad we are where we are because they're definitely helping us from a guest perspective..

Great. Thanks, guys..

We'll take our next question from Mitch Linhart with Baird..

Hi. Thanks for taking my question. You mentioned you're optimistic about your development pipeline in 2019 and bringing your brand to more new markets.

Could you just talk about what you're seeing that's giving you confidence to likely reaccelerate unit growth in 2019 in new markets?.

Yeah, Mitch, just to refresh the rationale of why we slowed down from our pace a bit, it really wasn't because we were in any way disappointed in the performance of our new restaurants, our class of 2017 and 2016, and before that in and of themselves gave us plenty of optimism to continue to build at that rate.

It was really the challenges that the industry and we were feeling around driving traffic and comp sales in our existing base of restaurants. And we felt strongly that given the headwinds and the turbulence, that we wanted our resources, most importantly our human resources, focused on our existing restaurants.

And so we continue to be encouraged by the performance of our new restaurants, including the restaurants that we've opened this year. And keep in mind, a higher proportion of our new restaurants are opening in a lot newer markets than when we were doing a lot more infills of our core markets of Texas, California and Florida before.

So particularly when we overlay the view, these are truly newer markets for us. We're very encouraged by the performance of these restaurants in these newer markets..

Makes sense. Thanks. And then regarding off-premise, you mentioned you believe it could grow over 50% over the next several years.

How are you building awareness and adoption for the initiative, and how you plan to build in the future? And then I was just wondering if you could give any additional perspective on the percentage of transactions that you might think are incremental or any average check, or anything like that. Thanks..

Well, I'll tell you. Both are good questions. In terms of building awareness, it's a combination. We're building the business through – from a distribution point of view through the help of our third party delivery partnerships out there. We're not building our own delivery physical infrastructure, so.

Keeping that in mind, we're working in tandem, particularly with our larger partners around co-marketing and driving the awareness through some delivery offers. And doing things like, we did a free pizza delivery day this year. Things like getting – drive some earned media, largely digitally focused awareness campaigns that are working quite well.

On top of that, we're doing a lot of in-restaurant work with banners and table tents et cetera, driving our guests into our own website, and app, and front end that we already have had developed as a function of the technology work that we did several years ago.

So it's really a dual-pronged approach, if you will, working with some of our good partners, and also driving awareness through our – again, another benefit of our loyalty program and in-restaurant traffic driving that awareness.

And I'd reinforce something I'd said before, that we're seeing the success of that growth somewhat surprisingly universally from a geographic perspective. I'd say at the outset we thought, maybe, it would be more concentrated in more urban high-density areas.

But we're seeing – seeing that in really every geography that we've enabled new delivery service has been – been very, very encouraging. So that is all good news. The second part of your question in terms of incrementality, we don't have an absolute way to measure the cannibalization or the incrementality of delivery.

But all I can tell you is we keep a close eye obviously on our traffic and trends both on-premise and off-premise and we have seen no relationship between growth in our off-premise business with a degradation in the growth of our on-premise business.

The strong sales that you are seeing and we're experiencing show very healthy traffic and sales increases on both sides of the business, and there's absolutely within our portfolio of restaurants not a correlation of on-premise sales behavior and what's going on in terms of off-premise.

Which is frankly what we expected all along, and that these are fundamentally different occasions and that by and large there's a very, very high level of incrementality when it comes to off-premise occasions and how they relate to on-premise business..

Great. Thank you very much..

Thank you..

We'll take our final question from Jon Tower with Wells Fargo..

Awesome. Thanks for taking the questions. So just a few. I believe in the first-quarter call you had mentioned that some of the data you were looking at on the consumer suggested that the middle income consumer was finally starting to pick up their spend again.

Is that something that – if you had seen that data again in the second quarter is that – did that trend persist?.

Jon, we haven't seen an update there. But where we're seeing the strength of our business we certainly continue to attribute a good amount to it along with the things that we've been doing as a business to a healthier environment in that with the middle income consumer for sure.

So yeah, we believe that trend has continued, but we haven't seen an update of that data..

Okay. And then just thinking about the – sorry, just lost my train of thought. I'll be there in a second.

Thinking about the different layers of sales improvement that you've had over the past probably 24 months now, closer to 18 months, with adding in the Slow-Roasted menu, the Brewhouse specials, and the Happy Hour specials is there anywhere that you see now that's a glaring area where you could improve the menu that maybe in the next 12 months it's going to be a focus area for you?.

I wouldn't describe any area or of our menu being a glaring opportunity as much as I mentioned in my remarks, I'm excited about the R&D pipeline. And I think Slow Roast, I think – a couple of years ago our Loaded Burgers, introduction (47:41), our EnLIGHTened were all very, very successful category level introductions.

And we're just looking at our most recent mix and it's interesting to see that our Hickory Brisket and Bacon Burger is still our number one burger on our burger menu and out selling our Bacon Cheeseburger, so some of those get lost in some of the most recent introductions.

But the reason I mentioned that is I think one of the keys isn't just the category level work, it's being able to be consistent about putting new compelling items that are unique in our space.

And I referenced our Peanut Soba Noodle EnLIGHTened entrée, the fact that the success of items that are tough to find in the competitive space in areas that are both EnLIGHTened and indulgent, we have a nice pipeline of those items still to go. And as I mentioned also leveraging Slow Roast and more.

So I think the key is just continue to focus on the quality and the uniqueness of the food, and I feel really good about that. But I wouldn't describe it as going after an entire category or a whole at this point..

Okay. Thank you. And then just in terms of a couple modeling things, the pricing for the quarter if you could just provide that. And then a clarification on the quarter-to-date, the 5%, I'm assuming that includes the benefit from the July 4. I'm just curious to know why the week of July 4 was actually a benefit to you this year..

Jon, in regards to the pricing, I think the best way that we continue to look at and how we try to manage our business is really the fact that we saw that 3% increase in average check. The gross check was up about 2%. So when we start to look at how incident works for us because we put the Brewhouse Specials on, and how mix works into it.

We're seeing a gross check of about 2%.

And then as we talk, we've been able to do less discounting, which is growing that net check to about 3% and frankly, I think the way we're thinking about that here for the second half of the year is very similar, meaning we're probably going to see our average check numbers in that kind of gross range of that 2%, 2.5% range.

And then continue with less discounting to move it around that three plus percent range. That's the first part. I think on the second part, I think when we look at the business last year with July 4 being on Tuesday, so last day of our fiscal quarter, most people celebrated over that long weekend.

And then when they went back to work let's call it on a Wednesday of last year, it was a really, really soft day. This year by people having July 4 off, you almost got this holiday in the middle of the week.

And while we all think of people going to picnics and other things, a lot of people ended up going to our restaurants, and we were surprised at how strong our restaurant volume was. I think it surprised us that we were up 29% to 30% that day.

So, yes, the 5% comp that we've been talking about right now that we're seeing includes that really strong Wednesday there..

Okay.

So it was open on July 4?.

It was. We're always open on July 4..

Okay. Thank you..

You're welcome..

Ladies and gentlemen, this concludes today's question-and-answer session and today's conference call. We thank you for your participation..

Thank you, everyone..

Thanks..