April 19, 2010 - 2:40pm EST by
2010 2011
Price: 26.40 EPS $0.52 $0.65
Shares Out. (in M): 29 P/E 50.0x 40.0x
Market Cap (in $M): 760 P/FCF nm nm
Net Debt (in $M): -40 EBIT 19 25
TEV (in $M): 720 TEV/EBIT 37.0x 28.0x
Borrow Cost: NA

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BJ's Restaurants is an expensive, gravity-defying stock.  It is heavily shorted, and it "acts" very well, especially recently, so these are the key risks.  However, the following issues are worth considering, and make this an extremely attractive short in my opinion.



1)  Valuation


It is difficult to justify.  Management claims that they can get to 300 stores, though it is worth noting that the most comparable concept, Cheesecake Factory, is stuck at 150.  Say that they get to 300 though, and hit their metrics: $5.5m of sales and a 20% 4 wall EBITDA margin.  Then this concept will be generating $1.65b of sales and $330m of restaurant-level EBITDA.  At that point, assume they would have $70m of corporate g&a (double the g&a on triple the stores from the current level), and $90m of depreciation.  This is around $100m of net income.  Since they will burn cash for the next 7 years to build out their store base (at $3.5m each, net of landlord contribution), and probably issue 14m shares in addition (basically, 25 new restaurants a year at $3-$4m over time, less an average of $40m net income until 2017), I am using a final share count of 42 million (raised at an average price of $30), which leaves me with $2.40 of eps.  A mature concept should get 15x so $36 in 2016, or an IRR from here of around 5%.   And that is assuming that everything goes right.



2)  Comps


BJ's has discussed the strength of its comps in many calls, but I believe that comps are misleading.  Specifically, revenues per average operating week were down 3.7% in 2008 and 1.4% in 2009, while comps were only down .3 and .8%, respectively.  Not terrible, but not great.  The company also breaks out the sales from restaurants open in the last year, from which one can deduce the sales from restaurants open in the last 2 years that are not yet in the comp base.  It is difficult to quantify, but are some strange fluctuations in this measure (sales per restaurant not yet in comp base but opened in last two years).



3)  Average check


Management is very promotional about the concept's appeal to consumers, saying that average check is $12 and thus is very affordable.  I find this misleading.  The average entree is $12, so the average check for a full meal is well in excess of this (a beer and 2 slices of pizza would hit the average though).  My guess is that there are a lot of customers that come in for a beer and that's it, and this brings down the average check.  But this is misleading-this is a high-end concept, competing in a very difficult and promotional casual dining space.  Pizza Hut's "$10 for any pizza" offer in January highlights the ongoing competition.



4) Related party transactions


A 15% shareholder of BJ's also own the distribution company (Jacmar) that provides all food, beverage, and paper goods to their California and Nevada restaurants.  Now, normally the issue is that related parties are being paid too much, but here I think the issue is that they are being paid too little.  Specifically, the company's California restaurants are responsible for 48% of the chain's COGS but 56% of their restaurants.  Oddly, in 2006 this number was 44% of the costs and 69% of the restaurants-one could easily paint the scenario that Jacmar was cutting BJ's a highly favorable deal in 2006 to allow them to "beat" numbers in the year after the IPO.  In any case, the change from 2008 to 2009 added around $1.3m to operating profit, or 6.5% of the company's total.  Further, one could argue that EBIT would be reduced by 43% if Jacmar was charging market rates:



year     2003 2004 2005 2006 2007 2008 2009
Jacmar as % of food/bev/paper 53.5% 57.1% 54.6% 44.2% 53.4% 49.5% 47.9%
EOP total restaurants           30           36           45           55           70           82           93
EOP in ca/nv             22           25           32           37           41           46           52
avg % ca/nv   73.3% 71.2% 70.4% 69.0% 62.4% 57.2% 56.0%
$ to jacmar     19.3 24.8 27.1        42.9        46.8        51.0
$ increase if jacmar at full px            4.8          7.2        15.2          7.2          7.3          8.6
  yoy change              4.8          2.4          8.0         (8.0)          0.1          1.3
ebit       6.3 11.1 13 15.4 14.2        20.0
  change as % of ebit       21.6% 61.9% -51.8% 0.6% 6.5%
  catch-up as % of ebit   75.7% 64.5% 117.0% 47.0% 51.5% 43.1%
  this ignores that CA is probably AUV higher than chain average      



5) Insider selling


In March, BJ's insiders sold around $7 million of stock.  I suspect there is more to come.


weak quarter, though no particular insight here

skepticism around Jacmar relationship, and dilution of their benefit as the company grows outside of California

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