Good day ladies and gentlemen, welcome to BJ's Restaurants, Inc., Third Quarter 2019 Earnings Release Conference. Today's conference call is being recorded. At this time, I would like to turn the conference over to Mr. Greg Trojan, Chief Executive Officer. Please go ahead, sir..

Thank you, Operator. Good afternoon, everyone, and welcome to BJ's Restaurants Fiscal 2019 third 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 Kevin Mayer, our Chief Marketing Officer and Greg Lynds, our Chief Development Officer on hand for Q&A. After the market closed today, we released our financial results for the third quarter which ended of Fiscal 2019, which ended Tuesday October 1, 2019.

You can view the full text of our earnings release on our Website at www.bjsrestaurants.com. Our agenda today, we'll 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 2019 and some preliminary views on Fiscal 2020 and after that we'll open it up to questions.

So, Rana, could you 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 results, performance or achievements expressed or implied by forward-looking statements.

Investors are cautioned that forward-looking statements are not guarantees of future performance, and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today's date, October 24, 2019.

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. Our third quarter comparable restaurant sales were negative 0.3% as industry sales weakened during the period by approximately 125 basis points as measured by Black Box versus the first half of the year.

Despite the near-term industry headwinds, we continue our over two-year trend of outpacing the industry in both sales and traffic while lapping last year's 6.9% comp sales increase and our 500 basis point beat versus the industry. Q3 sales remain challenged in California and were also impacted by Hurricane Dorian in Florida.

Across the industry, comparable sales in Q3 lagged the first half of the year in every market we tracked with the exception of Texas which remained essentially in line with the recent trends in that state.

In addition to the more challenged industry backdrop, our off-premise channel growth, while still very healthy, has slowed versus last year and there are a couple of reasons for this.

First, we're now comping against the full rollout of third-party delivery across our system and we intentionally pulled back on the level of third-party delivery promotions we offer.

As I mentioned on our last earnings call, as third party marketplaces have gotten crowded with other restaurant concepts, many of whom are attempting to drive trial promotionally, the productivity and economics of offers such as free delivery have diminished considerably.

While this has reduced the pace of delivery growth, we're happy to be building a profitable solid foundation in the off-premise channel versus buying unprofitable sales.

Overall, BJ's third quarter comparable sales results were unable to offset continued cost pressures coming from historically high wage rate increases and increases in food commodity costs and other variable operating costs.

While we successfully offset some of these pressures with improving labor productivity and ongoing cost savings initiatives, restaurant level cash flow margins for the quarter fell by 190 basis points.

While we're not satisfied with this outcome; several of our key indicators show that we are developing effective strategies and capabilities to succeed in this difficult environment going forward.

As challenging as the industry has been over the past several months, we are committed to our overarching missing of providing guests amazing value and executing BJ's Gold Standard levels of service and hospitality. As many of you on this call know, we track our performance across these areas meticulously.

Maintaining quality, value and service are the ultimate determinates of who will be the survivors and thrivers in the casual dining space; particularly as everyone is confronting the reality of needing to take price and grow check to partially offset the inflationary pressures we're all currently facing.

Given the current market circumstances, expanding and driving margins will be dictated by our ability to drive solid positive comparable restaurant sales coupled with disciplined restaurant level execution. We remain focused on maintaining our strong brand and reputation built on quality, value and Gold Standard restaurant level execution.

We will not succumb to the alternative of saving our way to success by making decisions which would reduce service and hospitality levels, compromise prudent maintenance in our restaurants or lower the quality of our menu offerings. All of which would erode the trust we have built with our guests and team members.

In Q3, we drove about 2.7% check growth; close to our current guide posts of around 3%.

Our biggest weapon in this battle is our broad menu which allows us to attract more guests to our differentiated center of the plate entree offerings while at the same time driving value through the lower price points inherent in our Brewhouse specials and happy hour lineups.

We continue to increase our entree mix primarily through the success of our slow roast platform while at the same time growing our Brewhouse specials and happy hour incidents by close to 10% in the quarter. As a result, our value scores improved measurably versus last year and we achieved commensurate improvements in overall recommend scores as well.

Again, we believe our continued success with these metrics speaks to our competitive strength and near and long-term positioning relative to our peers.

BJ's combination of value and quality through execution resounds extremely well with casual dining consumers as we consistently take valuable market share even as we lap last year's mid-single digit growth.

That said, we're aggressively pursuing several initiatives to further improve our guest value and convenience and drive even more traffic into our restaurants.

On the value front, our highest priorities include expanding our value offering during our lunch and weekend dayparts which have been more challenge than midweek dinners and late night shoulder periods.

We plan on testing some new and differentiated Brewhouse special offerings on weekends along with some additional compelling value lunch combinations. We also plan to put in place a value oriented takeout entree offer only available with an in-restaurant dining visit beginning in November.

This will provide an incremental check-building opportunity for us while delivering great value to our busy guests. Another top-line initiative now underway is our new catering platform which we rolled out earlier this year. These new offerings are doing extremely well generating around 25% growth, albeit on a small base for us.

We know this is a large opportunity across all our markets, especially as we approach this year's busy holiday season.

Lastly, we are hard at work at developing a paid subscription model for our beer-loving guests which will leverage our significant brand equity and award winning in-house brewing capability in the craft beer space while, once again, providing tremendous value to our guests.

We're in the early stages of this initiative and expect to be testing this program in the first half of next year. At the same time we keep exploring and developing new technology to reduce, and in some cases, eliminate pain points and bottlenecks for our guests and team members.

Our successful pioneering efforts with our app and proprietary online ordering enabled us to gain an early mover advantage in the delivery space while being the first major casual dining chain to utilize handheld order devices has sped up our time to get drinks and appetizers to our thirsty and hungry guests.

We know there are even more great opportunities through technology and innovation to make the sit-down dining experience even quicker and easier and therefore more accessible and enjoyable.

In this regard, we've begun testing the ability for guests dining in our restaurants to use their mobile phones and other mobile devices to reorder drinks, place Pizookie orders and pay their checks without having to download our app.

In addition, we're developing the ability to use those same mobile devices, again, without the need to download an app to order drinks, appetizers and entire meals, if they wish, while they're waiting to be seated in our often busy restaurant lobbies.

While we continue to believe that downloading our app delivers a lot of value to our most frequent guests and builds our customer loyalty database, we know that it is a barrier to greater adoption rates for some less frequent guests.

We're excited about the prospects for this new technology to solve the downloading and app issue for these guests as we provide them tech enabled convenience features to make their dining experiences at BJ's even better.

Finally, I'm extremely pleased with the performance of our new restaurants which continue to generate excellent ROI's as they open to strong consumer receptions and have set several sales records for openings outside our core California, Texas and Florida markets.

The strength of our openings is a clear demonstration of the long-term value of our brand and concept in more diverse, demographic and food diverse geographies. Importantly, this underscores our confidence in the growth prospects ahead of us.

Before turning the call over to Greg Levin for a review of the finances, let me summarize by saying that although we're not satisfied with our third quarter results, we remain encouraged by our underlying trends and initiatives in place to grow our sales and cash flow in the future.

We continue our momentum as a market share taker even as we lap the large gains of a year ago. Fueled first and foremost by our ability to deliver great value to our guests while carefully driving healthy guest check growth required in this time of arguably unprecedented cost pressures.

This is supported by our improvements versus last year in every dimension of our net promoter survey scores including value, food quality, pace, hospitality, cleanliness and finally, overall recommend. All of these show continued improvement despite check growth pressure and difficult labor environment.

We have the best operating teams in the business and I can't thank them enough for their commitment to our mission of making BJ's the best casual dining concept ever.

Lastly, our work on value builders like our takeout entrees, lunch and weekend extensions to our successful Brewhouse specials, our unique ability to deliver our credible award-winning craft beer club experience, our off-premise catering along with our commitment to utilizing technology to improve our guest experience all present meaningful opportunities for us to grow our business and margins the best way we know how and that's by growing our top-line sales.

Greg?.

All right, thanks Greg. Before we get to the quarterly details, let me remind everyone that beginning the first quarter of Fiscal 2019 we adopted accounting standards updates 2016-02 which is for leases that requires us to put the present value of our lease payments on our balance sheet as a right of use asset with the corresponding lease liability.

The new lease accounting standard also required us to make a one-time non-cash cumulative adjustment to retain earnings of approximately $29 million of sale lease back gains that we were amortizing in occupancy and operating costs over the term of the existing leases prior to the accounting update.

This is resulting in an annual increase in our operating occupancy costs of approximately $2.2 million.

This new accounting standard impacted our restaurant level margins and overall operating margins by approximately $600,000 in the third quarter or 20 basis points and reduced our earnings per share by $0.03 for the quarter, a full reconciliation related to the new accounting standard is included in today's press release.

Our total third quarter revenues increased 3.1% to $278.7 million driven by an approximately 2.9% increase in operating weeks and a 0.2% increase in average weekly sales. Our comparable restaurant sales were down three tenths of 1%.

This positive 50 basis point differential between our weekly sales average and our comparable restaurant sales is a direct reflection of the strength of our new restaurants.

This is even more impressive considering that over the last several years our new restaurant openings have been primarily in the Midwest and Northeast and not in California, Texas and Florida where we have greater brand awareness which generally leads to higher weekly sales averages.

BJ's strong new restaurant AUV's further reinforce and highlight our opportunity to double the platform and grow from 207 restaurants today to over 400 restaurants.

Q3 comparable restaurant sales were impacted by Hurricane Dorian as well as the week long closure in September for remodeling of our big sales volume restaurant in Woodland Hills, California.

We estimate that Hurricane Dorian negatively impacted our comparable restaurant sales by approximately 20 basis points as Florida, overall, had negative double digit comparable restaurant sales declines during that first week of September.

After the storm passed, our Florida restaurants returned to the solid positive single digit comparable restaurant sales trends as we have seen this year.

Our Woodland Hills restaurant -- our Woodland Hills restaurant which average over $6.5 million in sales per year, impacted comparable restaurant sales by about ten basis points due to its weeklong remodeling closure.

Therefore excluding the unforeseen impact from Hurricane Dorian and the temporary closure of our Woodland Hills restaurant, we estimate that our comparable restaurant sales would have been roughly flat with a year ago.

At the time of our Q2 earnings call in late July, we noted that California comps have slowed down for us beginning with the first week of July. For the entire quarter, California remained generally softer than many of our other regions though we began to see an uptick in California sales toward the latter half of Q3 and here into Q4.

Looking below the top-line, our cost of sales was 25.7% which is up 30 basis points compared to last year's third quarter and in line with our expectations. As we telegraphed on the last call, the increase is primarily due to higher produce costs from avocados and menu mix related to our very successful Tri Tip sirloin.

Our slow roast Tri Tip has been so successful that it was our number one commodity spend for Q3. Like our prime rib, the protein-centric Tri Tip sirloin specials have a higher cost of sales percentage but also generate a higher average check resulting in greater roast profit dollars.

Labor of 37.5% for the third quarter rose 80 basis points from a year ago due primarily to higher hourly average wages. There was some training and inefficiencies also in the quarter related to the completion of our Gold Standard Kitchen Systems and deleverage from Q3's comparable restaurant sales levels.

Hourly wage growth in Q3 was in the mid-single digits which is consistent with what we've experienced in Q1 and Q2 of this year and I would expect it to remain in that range for the rest of Fiscal 2019. Operating occupancy costs increased 60 basis points to 23.3% from last year's third quarter.

This increase is primarily related to higher delivery fees and maintenance costs related to our handheld server tablets as well as the 20 basis point impact related to the new lease accounting that I reviewed earlier.

Included in operating occupancy costs is approximately $6.4 million of market spend which equates to 2.3% of sales and is consistent with last year's third quarter.

Our general and administrative expenses of $14.3 million were approximately $1.3 million less than expected as we reduce restaurant support center incentive compensation based on performance to-date.

In terms of capital allocation, we continue to use our strong cash flow from operations to execute our expansion plan and invest in our business while opportunistically repurchasing shares.

Total capital expenditures for the nine-months ended October 1, 2019 were approximately $65 million and we continue to expect gross capital expenditures for fiscal 2019 to be in the $80 million range.

During the third quarter we allocated $41.3 million to the repurchase of $1.1 million shares of our common stock and we returned an additional $2.6 million to shareholders through our quarterly cash dividend. And as announced today, the board just increased the quarterly cash dividend by 8.3% to $0.13 per quarter.

With regard to liquidity, we ended the third quarter with approximately $24.4 million of cash and $158 million of funded debt on our $250 million line of credit which is in effect until November 2021. With trailing 12 months adjusted EBITDA of $130 million, our funded net leverage remains modest at approximately one time.

Before we open the call to questions, I'll spend a couple of minutes providing some commentary on our outlook for the remainder of Fiscal 2019 and some very preliminary thoughts on Fiscal 2020. 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 we begin Q4, we have seen an improvement in our comparable restaurant sales which are currently positive 0.6% or six-tenths of a percent.

While sales are not where we want them to be, it is encouraging to see positive comps as we are going against last year's $3.00 Pizookie promotion and a 5% comp sales in the month of October and for the last year's fourth quarter, we finished the entire quarter at 4.5%.

For those of you building models, the holiday calendar is not as favorable as last year. Last year, Christmas Eve, Christmas, New Years and New Year's Day, fell on Monday's and Tuesdays which created a long weekend and more time to go out and celebrate.

So this year, these holidays move to the middle of the week, that is Tuesday and Wednesday and News Years Day shifts to Q1 2020.

New Year's Day is one of our bigger sales days of the quarter and its shift from Q4 2019 to Q1 2020 is expected to negatively impact comps for the quarter by approximately 10 to maybe 20 basis points but will provide us with a nice start to Fiscal 2020. With regard to restaurant operating weeks, we are looking at approximately 2705 weeks in Q4.

Moving on to the rest of the P&L, I'm expecting cost of sales to be in the mid 25% range for the quarter. We're expecting Q4 labor to be in the mid 36% range.

While we're seeing some nice productivity days related to the learning from our recently completed Gold Standard Kitchen Systems, these efficiencies are not yet enough to offset the continued industry-wide wage inflation.

We are targeting operating occupancy costs in the mid-22% range for Q4 and that includes $7.6 million in marketing spend which is consistent with last year's marketing spend.

As we reminded you previously, labor and operating occupancy costs, as a percent of sales, are highly correlated to weekly sales leverages, or weekly sales averages in comparable restaurant sales grow. G&A expenses for the fourth quarter should be around $15.5 million to $16 million.

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

I expect the fourth quarter tax rate to be in the 3% range and that should be more in line with our current annual effective rate and, again, that's before any discrete items that may occur. Diluted shares outstanding should be in the high $19 million range for the quarter.

Looking ahead to 202, we are currently finalizing our financial plan which will be presented to our board for approval in December. So while we do not have an approved plan, let me provide you with some of managements preliminary expectations. We are targeting eight to ten new restaurants for 2020.

For modeling purposes today, I would use nine restaurants. We currently anticipate opening one new restaurant toward the end of the first quarter and up to three restaurants in the second quarter with the remainder in the back half of next year.

Moving on to some other metrics for 2020, we have not yet finalized menu pricing or our promotional calendars or new menu introductions, based on our current thinking, I would expect our average check gross to be in the 2% to 3% range.

If we want to balance offsetting inflationary pressures while protecting and promoting our overall value proposition, please note that this is as of today and is based on current expectations for commodity prices, labor rates and other inflationary factors.

With regard to our preliminary commodity basket expectations for 2020, we currently anticipate cost for our aggregate basket to rise between 1.5% to maybe 2% next year.

We expect to lock in most of our commodities for 2020 over the next couple of months and we'll have a better idea of any commodity variances when we report Q4 results in February of 2020.

With regard to labor, we'll have another California minimum wage increase as well as additional minimum wage pressures in other states and continued wage pressures due to the historically low levels of unemployment. We expect wage increase in the 5% range for hourly positions and that's pretty consistent with 2019.

Therefore, going into 2020, I would expect that labor will continue to be a difficult cost to leverage both for us and the industry at large and from our vantage point, the best way to leverage labor is to drive results from our top-line sales initiatives.

We are targeting operating occupancy costs in the high 21% to 22% range next year and that should include approximately 2.3% of sales and marketing. On the G&A line for 2020, our goal, as it's always been, is to continue to gain leverage as we grow.

As we said before, a portion of our G&A is related to growth and therefore it's going to be based on opening teams, recruiting costs, travel or mangers for our new restaurant. Our income tax rate for 2020 should be in the 8% to 10% range.

So in summary, BJ's remains a solid free cash flow generator with a flexible balance sheet, a significant long-term new restaurant growth opportunity and the strategically positioned within the industry to continue to take market share.

We have consistently outperformed the industry thanks to the strength of our brand and our Gold Standard level of execution. Our continuing focus to drive sales around new menu items, value platforms and technology will further different BJ's and move us forward.

We remain confident that these initiatives, coupled with our disciplined execution and the active management of our capital structure will deliver sustained long-term appreciation for shareholder value and we look forward to the balance of 2019 and 2020. That concludes our formal remarks. Operator, let's please open the line up for a few questions.

Thank you..

[Operator Instructions]. We'll take our first question today from John Glass, Morgan Stanley..

Thanks, good afternoon.

First, just back on the delivery comments, did delivery actually grow this quarter or did it shrink? I think your comments in July suggested it was a little soft, I just wasn't clear if it was actually contracting and how do you think about, you know, the competition delivery space? Is it new bar and grill operators that are entering and that is what's hurting you relative to them or is this just a broader comment that this is just a dilution of many brands and they're one of many that are kind of competing against those platforms?.

Thanks for asking that, John. No, no we still have solid double digit growth in delivery and so it's just calmed down versus where we were seeing it a year ago. So, that's the answer to that part. And, the answer is the latter in terms of -- I don't think it's any specific entries.

You just look at the pure numbers of folks playing in these third-market -- marketplaces, third-party marketplaces and the promotions they're in. It's just a lot more crowded..

Okay, and then just maybe -- I know you had outlined a number of initiatives to drive sales including focusing on some of the new -- some new value offerings and then there's some longer-term, I think longer-term, pieces around beer club, digital or mobile ordering without the app.

What's the sequencing of that or are some of those value offers in store now and those should have some effect on the fourth quarter or are they coming later as you have to refine them or fit them into the marketing calendar? How do we think about sales drivers over the next, say, one to two quarters?.

John, it's Greg Levin, let's suppose the value platforms are in tests right now so we think about for Q4, we're really excited about catering that we talked about which is the different side of things. We've also worked on the in-restaurant catering parties.

Also, as Greg mentioned, from a value standpoint we do have that take home offering but I think we're seeing what we're going to be doing or are doing, actually is the better way of saying it, is testing different value platforms here in this quarter and through the end of the year for next year along with the beer club and a couple of other initiatives that we talked about.

But looking for Q4, it's going to be around this takeout offering and it's going to be around some catering and some other things that we're doing and getting ourselves lined up, I think really, for the lunch and some of the weekend specials into 2020..

Next up we'll hear from Nick Setyan, Wedbush Securities..

Thank you. Greg, the [indiscernible], did it have any impact from like the L.A.

fires or anything else?.

No, it's probably got the impact from the Dodgers getting knocked out early here in the Southern California market but not really.

I think, you know, the fires have been somewhat contained going into at least this week and I know this week, I know, Nick, you're local here, something's going to be a little bit heavier in regards to wins and things like that and we'll have to watch out for that and, you know, basically wish that there, frankly, doesn't have any major fires to displace anybody..

So, is it safe to assume that the margin commentary for the quarter is predicated on the current quarter day comp or are you assuming that because you have a slightly easier compare for the next couple of months that we might see a little bit of a higher comp?.

It goes back and forth. We don't necessarily -- do two things; first of all, we don't give and we talked about this before, pure comp guidance on the quarter. We tell you where we are today and I do a lot of my analysis on cost per week and things like that in regards to when I think about where our numbers are going to come in from that standpoint.

So while our comps do get easier from that standpoint, I also know that there's still labor inflation, we know where commodities are going and things like that to try and give our best estimate of that timeframe..

Fair enough and just lastly, any more detail around the description model for beer? I man, any more color on that would be very helpful..

Yes, we're not at the point where we want to disclose that, Nick, for a host of reasons including competitive ones.

But, I would reinforce when you look at -- you know, we've been brewing beer for well over 20 years and I think collectively it probably won more, you know, significant industry quality awards than certainly any chain restaurant out there that we think we can bring some pretty unique offerings and value to our beer loving guests here.

So, while we're excited about it, it is still a bit early and, as we mentioned, we will be ready to test and -- it will be in California in the first half of next year..

Next up is Jeffrey Bernstein, Barclays..

Great, thank you very much. Two questions; just one on the restaurant margin. Just wondering whether internally you maybe set some sort of theoretical floor where you say this is where we're willing to let it go to but perhaps not further; whether it be by taking incremental price or by more cost cutting; obviously comps are hard to come by.

Or maybe on the flip side you just let margins slip a little bit to protect the trust with the guests and the team members that you mentioned earlier, just trying to frame how you think about protecting that margin going into 2020 with the cost pressures high..

Hey look, I think -- there is no magic number there, Jeffrey. There's -- you know, it all depends on the environment and comp -- competitive environment out there but I can tell you, you know, it's hard to imagine the scenario.

I can't imagine a scenario where I'm CEO where we're going to risk the long-term brand and health of our concept, you know, over margin in the short-term.

Now, having said that, you know, what we tried to communicate today and have consistently is we'll work really hard at going after the cost structures so we can have more flexibility and drive value and take less pricing in environments like this but also looking at structural ways of -- although we're not investing in technology as a cost cutting measure, you know, if some of these things that we're working on are successful, it will take some pressure off of labor at the same time.

You know, our number one priorities is improve the guest experience and speed and convenience; all the things we talk about that, you know, the world of plentiful hourly labor I think -- you know, this is not a temporary issue, right? So, we are looking at structural ways to improve our concept that will enable us to take some pressure off our system and our concept structurally..

I think also, Jeff, real quick as you talked to those things, you know, we're -- we're diligent and religious in regards to our execution on the cost structure and our business and really it's a function of driving that top-line sales into our numbers.

Even when you look at operating occupancy that has been going up, if you pull out the change in accounting on this last quarter, it's up a little over 1%. I think it's like 1.5%.

You take $600,000 and divide it by the weeks, take the numbers out, which I give everybody, you'd be surprised at our ability to kind of manage those things and even when you look at wages and start dividing it by the weeks versus last year, you start to see those things come through which is around initiatives like our Gold Standard Kitchen Systems, operating occupancy, get around items where we do reverse auctions and so forth from that.

But ultimately as you saw even last year, the way you drive margins is by driving top-line sales and as Greg Trojan talked about, we're not going to go down the slippery slope of trying to dummy down the concept, so to speak, or try to save our way to success that the guests will turn on our business when we have industry leading guest traffic per square foot.

So, we're going to continue to work on all aspects of our business to do what we can to drive top-line sales and continue that execution on the cost side..

Understood. And my other question was just on the comment you made about the sales of the new units being strong which is encouraging and you talked about kind of outside of California, Texas and Florida.

Just wondering how you think about the profitability on those stores, presumably as you open up one or two in a new market; the efficiency would seemingly be less than in your core markets.

So, however you think about it, I'm just wondering on an order of magnitude how you compare new stores profitability, which presumably we'll see more new stores in these newer markets relative to your core..

Yes, the profitability on those new restaurants generally are going to be as good, if not better, than some of the existing restaurants mainly because your costs in the labor line are different. If you compare us versus California, using that for an example, versus some of the areas in the kind of Midwest.

So generally we're able to get a better from a margin standpoint.

We're still not doing some of the California sales levels which, you know, has always been one of the differences at BJ's, but seeing these new restaurants hitting AUV's that are somewhere in the $5 million plus range for our business is exciting and as we get larger, we get more scale and efficiencies around whether it be commodities or whether it be around the marketing side as Kevin and his team work to continue to build our brand awareness.

So, we don't look at these restaurants as an area that generally has a lower return than our existing restaurants..

Alex Slagle from Jefferies is up next..

Thanks for the question.

So, stepping back a little bit, you had a pretty big buy-back during the third quarter and higher debt levels and then plans to accelerate unit growth next year, so all that signaling a lot of confidence in the business for 2020 and certainly appreciate your outperforming your peers and good strong guest metrics and store volumes, but what are you seeing that drives your confidence when sort of the broader casual dining landscape seems to be perhaps a bit softer and the cost environment continues to inflate?.

Well look, Alex, we're not as confident as we are about our concept.

We're not forecasting a dramatic turnaround at a party next year industry-wide either but, you know, given all the data that we have and the momentum generally that we're seeing in the business and confidence in the concept, you know, we think we're being balanced about the approach here.

I mean, we're not coming out and saying we're going to open 15 restaurants next year or lever up to three or four times here. So, you know, I agree with your comments around our confidence and optimism but I think we're still being measured in our approach and not taking undo risks in any particular aspect of the plan in our capital allocation..

Certainly, great.

And the dynamic in California, I mean, any unique competitive issues impacting you or if you could talk about the steps you took from a marketing standpoint to try to drive that business in the third quarter and what your plans are for the fourth quarter to try and prove it further?.

We talked about a few of them going forward. I think in general it's around the formula that is basic for us and I do think it's about imparting value.

And I think striking this balance of, look, we -- everyone in this business has to drive some guest check, right, and those that can do that without sacrificing fundamental value and actually add value to the equation I think are going to be the winners here so, you know, all the things you heard us talking about, you know, Greg pointed out even in the fourth quarter here.

You know, I think these take-home entrees are great values. And actually we'll also -- part of our thinking was also they'll help see trial for our takeout and delivery business as well. When people see -- because there's a select number of entrees, namely five here that carry really well and reheat really well.

So, you know, part of the program is at these kind of value equations, we'll generate a lot of trial in our business but fundamentally it's around value and striking the balance of being able to still figure out how to drive, grow some check to offset this wage rate and other inflation but I think that's really the key is how can you keep driving great value and deliver the experience and drive some check to offset inflation.

That's really what we're trying to do here..

Our next question is from David Tarantino, Baird..

Hi, good afternoon.

First question for Greg Levin, I think looking into 2020 you mentioned 2% to 3% check growth and I was wondering if you could comment on what level of traffic performance do you think you would need to hold the restaurant margin structure flat?.

David, I don't know if we have an answer on that quite yet because we haven't put together all of our financial plans and taken in all the metrics into the business. But I'm not -- I don't know if next year would be really different than this year.

You've still got the same wage rate inflation out there which is really been the crux, I think, of our business this year in regards to the ability to not leverage it like we'd like and I think going into 2020 you see that same dynamic playing into the business.

So we've said this year that probably 3% around the number that we would think about and that's kind of -- you think about that being an overall comp of around 3%, I guess. So, I'd probably go with that but it's a little early until we kind of put all our inputs and kind of roll up our plan in total..

All right, okay. Thanks for that.

And then I guess, Greg Trojan, you laid out sort of several factors that I think could drive comp performance but one of the things that wasn't on your list was marketing and I just wanted to know if you could speak to what role marketing might play in driving better traffic performance in this environment and what do you think more spending behind marketing would be of any value as you move into 2020?.

Good question, and I don't leave -- I could go through the whole list of what we do everyday, right, that is really fundamental to driving sales and success in our business. So, in the interest of time and highlighting what's extremely new and different, so I don't leave marketing out for obvious reasons. So thanks for asking about that.

And so as part of the planning process of every year we do look at that and will, in the process of evaluating opportunities to spend up productivity, we -- again, we've done a bit of that over -- through the last number of years as -- as we've increased our level of spend historically from the middle like 1.5% kind of percent range into the 2% to low 2% of sales today.

But the short answer is, you know, we're looking at -- we -- this is when we start looking at opportunities to do just that and if we identify those we'll pull the trigger. You know, fundamentally awareness, in particularly these newer markets is still one of the bigger opportunities that we have at BJ's.

You know, I've mentioned this before I think maybe in the last call around -- you know, we do a periodic ATU study where we measure our -- not just our brand awareness but the brand attributes and we've been doing -- and the team have been doing a nice job and have seen some nice moves on both awareness and brand strength.

So, we know spending will, can, speed up particularly the awareness part of the equation there, it's just a matter of with our amount of density and some of these newer markets, the ability to support it with EBITDA on the other side here. So it's always a balance but good question..

Real quick, David, even though we don't get into specifics of it, even like in this last third quarter, we increased our kind of digital and loyalty in California. We've seen some nice improvements in our California trend. So we have a lot of tactical things that we do within the quarters in regards to guiding our business.

As you think about the fourth quarter, you know, we talk about it more from a menu standpoint but the takeout items that Greg Trojan mentioned, that's going to be all supported by marketing, getting that awareness out to drive our business and then as we go into the planning season, we put together the entire plan for next year..

Yeah, I mean I think I'd just add kind of holistically to that question, you know, we're constantly evaluating our market strategy and our media-mix strategy. I think we've got an opportunity in 2020 to look at that media mix with the emerging -- the changes in the medium place in terms of how you reach our guests, how you can target with them.

It gives us some opportunity to possibly expand in some other markets. You know, our loyalty database is a huge asset to us.

I think we're upwards over 20% of our sales going through that and we continue to test and learn in areas of segmentation, possibly frequency players down the road, etc., and then I think in the local restaurant marketing space we've been so good at that in the past, I still think there's opportunity for us to, along with operations, to do a little bit more outreach locally whether that be paid, non-paid, earned type of initiatives together along with partnership with our GM's and our DO's and I think there's a lot of upside there.

So that's what we're looking at today for 2020..

Our next question will come from Chris O'Cull, Stifel..

Thanks, good afternoon guys. Greg, this year's sales investments, or sales initiatives, required quite a bit of P&L investment.

Just based on the initiatives you described for next year, what level of P&L investment do you expect to make next year?.

I think the big P&L investment this year was really around our Gold Standard Kitchen Systems and then we also rolled out Tri Tip. So those are kind of the two that probably impacted us the most earlier in the year, and as we mentioned on the call, the GSKS team behind us, we feel pretty good about overseeing out of those results.

I think next year it's a little bit less in regards to that. We're going to do some continued studying around ways that we could be more efficient within our restaurants in regards to our service model, both on what we call the other side of the line and within the dining room.

Again, our restaurants are big, it takes a while for us to get from the -- from Dining Room 3, as we call it, into the kitchen. So those are all areas that maybe we can be faster at. So we're going to do some consulting and analysis around it but I don't see any of that kind of impacting our business like it did this year.

As we work through some of the technology side of things, as Greg Trojan mentioned, especially around the ability to use your mobile phone for ordering within our restaurants or even paying without downloading the app, I think that actually gives us more efficiencies with not really an investment from a training standpoint that we saw this year.

So, right now I don't think they're going to be as significant as they were this last year. This last year, 2019, was probably a little bit more like 2017 and we got the fruits of that labor coming through sort of second half of 2017 into 2018 in the first half of 2019 and I think what we've done this year actually sets us up well for next year..

Do you expect any significant investments need to be made to start up the beer subscription service?.

Not inside the restaurant as much. That's going to be a lot of work on both the corporate side of things and our brewery team. You know, we're lucky in the sense that we've got five operating breweries.

Some of them are specific R&D breweries where we win a lot of gold medal awards and we're going to take some of those gold medal awards and other things and really develop them. I consider some unique creative beers that our subscription members will be able to get. So it shouldn't be as much in the restaurant..

But it may be hard capex. I mean, that P&L investment, Chris, will be some of that in terms of bottling, canning lines, etc., but that -- I don't think it will be a little bit of G&A but nothing from, as Greg said, a restaurant P&L perspective that would be super significant..

Chris, I do think things like -- real quick, the takeout offering that we're doing here in the fourth quarter and depending on the success of that, those could add a little bit of labor because you're making some items ahead of time, you're getting them, you know, you're chilling them down and they're ready to go and you can sell them right away.

So there's going to be some blips and curves on things like that but a lot of that's normal in regards to rolling out new menu items versus the investments we did this year..

Okay, and then I know the company struggled to reach its check growth target, especially at the beginning of this year, what gives you confidence that you can grow the check at the rate of 2% to 3% next year?.

Well, that was a first quarter phenomenon that we've been through a lot.

So I think the subsequent to frankly even into the last part of the first quarter when we took corrective action around the promotional calendar, we feel like we've struck a good balance there and when we say we want to be at 3%, we're not going to -- we're at 2.7% I think for this quarter, you know, we're not dialing in that in exactly.

You know, we just -- we want to be in that range and we've been pretty consistent about it. So, like I said, I'm -- feel very good about the fact that we're driving better value scores and have been able to do that with that level of check growth. So, you know, that's why.

You know, I think the menu pipeline is looking strong as well and I think we'll continue to build on the success of Tri Tip just like we did in prime rib, in fact, we were seeing prime rib sales grow again even after some initial canalization from Tri Tip.

So, this menu that we have is, first of all, one of the most important consumer attributes is our variety but it gives us the ability to pull, you know, levels from a menu perspective that a lot of other concepts don't have the same breadth to be able to do that..

And then just lastly, Greg, do you think the push for catering during this holiday season, given it's really you all's first go at it, do you think it can be a material boost to the comp sales this holiday?.

Listen, I think it can be a help but I wouldn't -- honestly, I don't think it's going to be a game changing material boost given the small base that it's starting out as. I think it's going to be a bit of a medium slower build, Chris, and it's not at the same level of delivery.

I think it's the right thing to be doing and we're encouraged to be seeing that kind of 20%-something growth but it is a kind of word of mouth habit, you know, kind of forming behavior that's going to take a little bit of time. So I think -- you know, I wouldn't call it -- it's not an instant game changer..

And we'll take our next question today from Matthew DiFrisco, Guggenheim..

Thank you, I had a question with just a couple of clarifications first. I think back on the last -- on this call last year, there was a shift to the Pizookie day promotion which made you guys characterize the quarter-to-date comp at 4% but now you're saying that the year ago October was 5%.

So, I'm assuming that 5% is all in, it's got the Pizookie shift so -- is that correct then, it's 5% and it slows down to a full quarter of 4.5%?.

That's correct, last -- we're apples to apples in regards to kind of our quarterly free Pizookie day..

Okay. And then if I were to look at sort of -- if you could sort of unbundle the incremental investments, the Gold Kitchen standard as well as the handhelds you called down on the previous call also, I think you were saying those were all in about 10 to 20 basis points or so incremental to the occupancy and operating line.

I'm curious how -- what are we lapping in the fourth quarter? Can you remind us when those started, when they unwind and assuming that the majority of those are behind us as we leave the year and maybe even sometime in 4Q..

I'm not quite sure I understand your question. Our handheld's we rolled out in 2017--.

I think he's talking about the maintenance--.

The maintenance cost -- so we start to lap that, I guess, here in Q3 and Q4 a year ago. But I'm--.

So it will be in Q4?.

Yes..

And then the number of stores that went through, I think you said 140 stores in the second quarter did the new kitchen and that takes a little bit of training and a little bit of incremental labor hours. So I would have thought you would have had, in the third quarter, less of a drag from that as well.

So, it was less than the ten basis points or so that you called out in the second quarter?.

I would -- yes, that would be. You've got your initial training then you have about four weeks or so if you get everything in the habits, the way we want them, and then we start leveraging the business going forward from that standpoint.

So, Q2 had a lot more of that initial training, that initial costs and Q3 had kind of the lag period that went through it and then we're [indiscernible]. We've seen actually some nice labor productivity really going into September and I think it should give us a little bit of a tailwind here in Q4.

But, I want to be clear, it's not enough to offset kind of the single-digit wage inflation that we see in our restaurants..

Completely understood.

Okay, and then just to better understand the entree promo, buy one, take one, that's going to be throughout all of the stores or is that just being introduced first in California in the quarter?.

We're doing that in all restaurants..

Okay, and I assume that is structured as far as the price point of an entree that you'd have to buy and the products that you're allowed to take home; it would be margin accretive as well as check accretive?.

Yes, in terms of margin and sales accretive.

I'm not sure what you meant by the front-end -- we're limiting the offering to five entrees, to get a little more specific, so that we can control both quality intrepid, etc., but the answer is, yeah, we think it's a great check builder and I think ultimately a nice traffic builder as people -- I think people will enjoy the value and the convenience for a subsequent meal..

And next up is Will Slabaugh, Stephens Incorporated..

I had a follow-up on delivery. You mentioned that growth explodes somewhat and you seem to be going about that business in a more measured and profitable way.

Could you give us an update on how you're thinking about the overall profitability of that business and if there's been any change in how you think about the incrementally of delivery?.

So Will, sorry, not really.

You know, I think the change really has been in the promotional spend and effectiveness of that spend but the foundation, you know, economical, economics of still incremental sales, there's still a lower percentage margin but it's still delivering incremental dollars that we're leveraging against our fixed costs in our restaurants.

So, you know, our view is still optimistic and we look forward to continuing to grow the channel. I just think we're making a prudent decision to not jump in, you know, crazily on when the economics are, you know, we think even more challenging than they were a year ago in terms of the promotional spend..

Yeah, and I think, Will, one of the comments that Greg made on the call was after Q3, we were pretty much in -- had delivery in all of our restaurants last year. So, as we are in Q3.

So, now from a comp sale standpoint it's not so much adding restaurants and what we're seeing out there is the marketing cadence by others as well as ours when you do marketing initiative, you don't get quite the lift that maybe we saw a year ago. So, we want to be prudent in ways to grow that, that is profitable.

But the overall underlying business delivery is solid for us. It grew double digits in this quarter and we think it's an important part of our business..

Understood, and one other one if I could on the Gold Standard initiative.

I know there's a lot going on behind the scenes yet that we can't see, but I was curious how would you think about a point at which we might expect to see some sort of P&L benefit; whether that be improved throughput and sales or maybe cost efficiencies or you view this more as we need to do this to sort of keep up and maintain our best talent..

Well, one of the things I've mentioned, that I don't think we mentioned in our prepared remarks, Will, it reminds me is we are seeing an improvement in turnover in the kitchen that I think we mentioned was early last -- on the last call but we're continuing to see that.

And I'd say that it's, you know, it's a meaningful momentum change that we certainly think is one of the most important reasons we went after this GSKS initiative to make our kitchens, you know, fundamentally better places and easier places to work.

So, we're really happy about that aspect but all of our key metrics around not just efficiency but order times and throughput, etc., you know, are headed in the right direction.

Again, this isn't going to change productivity by orders of magnitude, but look, we're in the business of constantly improving everything that we do and we think this is taking a nice step forward from a kitchen perspective..

Yes, I think if we [indiscernible] I think we will show going into 2020. You'll see the leverage there and, again, I think that's one of those areas that people somehow, on the other side, I think you kind of mentioned it, we're not seeing everything. Don't quite understand.

We're not going to ask our restaurants to all of a sudden have a server run eight table stations or ten table stations. We're not going to get rid of somebody at the hospitality desk. We're not going to tell, ask, our kitchen people to -- if you're on pizza to do pizza and now do salad. Those things don't make sense for us.

You're not going to grow your sales by doing things like that. So, we've got to basically put things in that we can be faster and more productive at and that's going to allow us to grow sales and that's always been our mantra at BJ's and that's how we're going to go after our business.

We've seen too many other companies that get on these calls, they talk about the fact that we're eliminating X, Y and Z positions and all of the sudden they've got a big line at the front door because there's nobody taking care of the guests as they walk in. They've got a server that is sweating because they've got 15 tables to take care of.

We're not going to go down that path. I think as Greg mentioned early on, you know, ultimately it's about serving -- having a better quality dining experience which is what we're about at BJ's..

We have time for one further question. It will come from Sharon Zackfia, William Blair..

Hi, good afternoon.

Sorry if I missed this but could you tell us what off-premises was as a percent of sales for the quarter? And then kind of going to the beer subscription service, is that going to be used as an opportunity to drive foot traffic into the restaurants? Meaning, highly encouraging customers to come pick it up or is that something that's more of a traditional kind of beer of the month and it's going to be shipped to the customers?.

It is very much weighted towards traffic in the restaurant..

Okay..

And then on your first, we're in that that 10% to 11%, is total off-premise..

And ladies and gentlemen, that does conclude our question and answer session and it also does conclude our conference for today. We would like to thank you all for your participation and you may now disconnect..