BJ's Restaurants Inc

NASDAQ:BJRI

Earnings Call Analysis

Solid Q2 Growth and Positive Outlook

In the second quarter, BJ's Restaurants reported a 13% increase in adjusted EBITDA year-over-year, with net income rising over 40% to $17.2 million. They achieved record weekly sales averages and improved restaurant margins to 15.5%. However, comparable restaurant sales were slightly down by 0.6%. Looking ahead, BJ's expects Q3 comparable sales growth of 1-2% and anticipates continued margin expansion. Strategic initiatives, including new service models and remodels, are driving efficiency and guest satisfaction, positioning the company for sustained growth.

Strong Sales Performance Amidst Challenges

In the second quarter of fiscal 2024, BJ's Restaurants reported total sales of approximately $350 million, indicating a slight increase compared to the previous year. On a comparable restaurant basis, sales declined by 0.6% but showcased a positive trend heading into June, a month that benefited from key holidays such as Mother's Day and Father's Day. The company achieved a new weekly sales average record of over 141,000 during the week including Mother's Day, underscoring the brand's strong consumer appeal during special occasions.

Margin Improvements and Cost Management

The company demonstrated robust margin improvement, with adjusted EBITDA reaching $36.1 million — a 13% increase year-over-year — and a restaurant-level cash flow margin of 15.5%, which improved by 100 basis points from the prior year. The strong margin performance resulted from ongoing cost management efforts and operational efficiencies, with labor and benefits expenses constituting 36.1% of sales, down 10 basis points compared to the second quarter last year. However, food costs were affected by inflation on critical items, including bone-in chicken wings and avocados, contributing to a quarter-over-quarter food cost increase of more than 2%.

Strategic Pricing and Promotions

BJ's adjusted its pricing strategy to balance consumer demand while driving profit dollar growth. In May, the company implemented a moderate pricing increase of approximately 40 basis points, significantly lower than the previous year's increase. Although check growth moderated in Q2 to the mid-2% range from mid-4% in Q1, the company aims to optimize its pricing approach going forward. The introduction of promotions, such as the Pizookie pass, is expected to enhance foot traffic and increase overall sales, although it may impact average check sizes.

Guidance for Future Performance

Looking ahead, BJ's anticipates Q3 comparable sales growth in the range of 1% to 2%, despite the historically weaker sales in this quarter due to seasonal patterns. For the full year, management aims to close the gap to 2019 margin levels, with a target of achieving restaurant-level cash flow margins in the mid-12% area in Q3. Marketing investments will rise by 50 to 70 basis points compared to Q3 of 2023 to boost brand visibility and attract customers.

Operational Enhancements and Future Growth Strategies

BJ's is focused on enhancing the customer experience through operational improvements and a refined service model to drive throughput. Initial phases of a new service model have begun yielding positive results, particularly during peak dining times. The company's remodel initiatives, having completed 19 remodels year-to-date with plans for five additional ones this year, are intended to increase operational efficiencies and drive sales growth. Furthermore, BJ's plans to introduce new restaurant prototypes featuring lower build costs, aiming to achieve long-term sales growth targets of 8% to 10% annually through strategic site openings and consistent remodeling efforts.

Financial Health and Shareholder Value Initiatives

The company ended the quarter with a healthy balance sheet, reporting net debt of $47.3 million. During the quarter, BJ's repurchased approximately 255,000 shares for $8.8 million, with $52 million remaining under its share repurchase program. This disciplined approach to capital allocation aligns with BJ's commitment to delivering long-term shareholder value while driving sales and profitability initiatives.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the BJ's Restaurants, Inc. Second Quarter 2024 Earnings Release Conference Call. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Rana Schirmer, Director of SEC Reporting. Please go ahead.

[Rana Schirmer, executive]

Thank you, operator. Good afternoon, everyone, and welcome to our fiscal 2024 second quarter investor call and webcast. After the market closed today, we released our financial results for our fiscal 2024 second quarter. You can view the full text of our earnings release on our website at www.bjsrestaurants.com.

I will begin by reminding you that our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements.

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 will refer to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission.

We will start today's call with prepared remarks from Greg Levin, our Chief Executive Officer and President; and Tom Houdek, our Chief Financial Officer, after which we will take your questions. And with that, I will turn the call over to Greg Levin. Greg?

[Gregory Levin, executive]

Thank you, Rana. BJ's delivered another quarter of restaurant level margin growth and adjusted EBITDA growth of 13% over the same period last year.

These solid results again highlight the benefits of the strategies we shared at our Investor Day in November. Our approach focuses on driving sales through our familiar Made Brewhouse fabulous culinary initiative, increasing and enhancing our brand awareness, improving our operational excellence through our people initiatives centered on our gracious hospitality and enhancing our ambience through our remodel initiative.

Additionally, our holistic top line approach to driving sales is complemented with our margin expansion initiatives through productivity and cost savings enhancements. These strategies are working and continue to establish a solid foundation for financial and restaurant growth and enhancement of shareholder value.

We finished the quarter with total sales of $349.9 million, while comp sales were slightly negative at 0.6%.

However, throughout the quarter, we saw a month-over-month improvement in comp sales, driven by guest affinity for the BJ's concept and choosing BJ's to celebrate important moments like Mother's Day, Father's Day, and graduations.

Reflecting this strong guest affinity to the BJ's concept, 107 restaurants broke either daily or weekly sales records in Q2. Furthermore, our restaurant margins continue to expand and rose to 15.5%, representing an increase of 100 basis points from the prior year.

Our restaurant level cash flow per operating week was approximately 19,200 just slightly behind fiscal 2019's restaurant level cash flow per week of 19,300. So, while percentage margins were still behind 2019's levels, we closed the gap on the dollars per restaurant week.

Adjusted EBITDA in the quarter rose to $36.1 million, an increase of $4.3 million or 13% higher than prior year. Our team did an amazing job focusing on driving throughput in our restaurants this past quarter as we rolled out the second phase of our gracious hospitality people initiative.

If you recall, the first part of this initiative focused on new server scripting and we've launched last year. In April, we initiated our enhanced service model, which balances the number of cables per server, food runners and quality SaaS expedited positions in our restaurants.

These changes allow servers to get to our guests sooner so we can get orders into the kitchen and the bar faster. It also frees up our managers so that they have more time to be in the dining room to ensure we are delivering the gold standard level of operational excellence for our guests.

And, it elevates table turnover, which in essence, expands the capacity of our existing platform.

The goals of these changes are to improve our pace and throughput in our restaurants and further improve our already high standards of service and hospitality. Based on our consumer research, we know that pace and throughput is another opportunity for us that will drive top line sales.

In addition to enhancing our service model, we are also evaluating and testing other technological enhancements that will help us further improve throughput in our restaurants.

These include changes to the way our kitchen display system informs our team when to fire or begin cooking an item to changes to our server tablets second form our team members where the guest is during their dining experience with BJ's.

I want to thank our team members for diligently implementing these service model changes. It was a large undertaking, and our teams executed it flawlessly, knowing that these changes deliver a better guest experience, which ultimately continues to drive top line sales.

Our next gracious hospitality phase will be new hourly training for all restaurants, and that is expected to roll out later in Q3 and in Q4. This will include additional side-by-side training for all new hourly team members.

Overall, we continue to expect these initiatives to take the better part of Q3 and Q4 of this year and have a slight impact on training labor for these quarters. These investments in our team are critical elements to driving top line sales since every additional sales dollar leverages the 6 elements of our restaurants cost structure.

As we've said on past occasions, the best way for us to improve our restaurant level cash flow is by driving sales, and we have a proven playbook and strategies that are helping us meet this goal.

We also continue to execute against our remodel initiative that is similarly driving improved sales and traffic. We have now completed 19 remodels year-to-date, and we expect to do approximately 5 more this year. By the end of this year, we will have remodeled approximately 70 restaurants since we began this initiative.

We will finish fiscal 2024 with approximately half of our restaurants either recently remodeled or one of our newer prototypes. With the success of our remodel initiatives, we have been effectively and prudently deploying capital.

To date, we have opened one new restaurant in Brookfield, Wisconsin, and we expect to open our next two restaurants in August and September of this year. Both new restaurants will feature our new prototype that will cost approximately $1 million less to build, bringing the investment cost down to around $6 million on average, and that's net of landlord allowances.

This new prototype also provides greater operating efficiencies and higher and faster returns while incorporating our learnings from our remodel initiative, which includes lighter colors and a more contemporary bar featuring the 130-inch television as the focal point.

Our long-term model for our business continues to be to drive top line sales in this 8% to 10% range through a combination of 5-plus percent unit growth and comparable restaurant sales in the low to mid-single digits.

However, as we've communicated previously, we are going to do so with the right quality and at the right investment cost to continue to drive strong new restaurant investment returns that deliver shareholder value. At the same time, we continue to expand margins through sales leverage and productivity and savings initiatives.

Our continuous focus on optimizing the business and our solid financial cadence results in significant free cash flow, which we will translate into enhanced shareholder value over the medium and longer term.

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

[Thomas Houdek, executive]

Thanks, Greg, and good afternoon, everyone. I will provide details of the quarter and some forward-looking views. Please remember this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC.

For the second quarter, we generated sales of $350 million, which was slightly higher than last year. On a comparable restaurant basis, Q2 sales decreased by 0.6%. From a weekly sales perspective, we averaged more than 124,000 per restaurant.

Our strong and efficient restaurant execution, as Greg just outlined, in conjunction with cost savings from our margin improvement initiatives, helped BJ's again improved margins in the quarter.

Our restaurant level cash flow margin was 15.5% in Q2, which was 100 basis points better than a year ago, demonstrating again the benefits of our ongoing initiatives to drive efficiencies and the solid foundation we have built for continued growth.

Adjusted EBITDA was $36.1 million and 10.3% of sales in our second quarter. Q2 EBITDA grew by 13% year-over-year and beat the prior year by more than $4 million with a margin that was 120 basis points higher.

We reported net income of $17.2 million and diluted net income per share of $0.72 on a GAAP basis for the quarter, which were each up more than 40% from a year ago. As Greg mentioned, our comparable restaurant sales improved sequentially through the quarter and finished with a modestly positive comp in June.

During the quarter, we set a new weekly sales average record at more than 141,000 across our system in the week that included Mother's Day.

Also, we mentioned last quarter, we have been scaling back the degree of menu pricing compared to last year. In May, we only took a small pricing round of approximately 40 basis points, which was more than 200 basis points lower than our Q2 2023 pricing round, leading to a comp headwind in the quarter as we lapped last year's elevated pricing round.

The foundation we are building is allowing us to take a more balanced pricing approach to maintaining our traffic driving value with adding appropriate menu posing to deliver profit dollar growth.

Our check growth moderated to the mid-2% area in Q2 compared with the mid-4% check growth in Q1. This was driven by our carried menu pricing in the mid-3% area in Q2, down from the mid-5% area in Q1.

Moving to expenses. Our cost of sales was 25.7% in the quarter, which was 20 basis points favorable compared to a year ago and 50 basis points unfavorable compared to the prior quarter. Food cost increased by more than 2% quarter-over-quarter, driven by inflation on key items such as bone-in chicken wings and avocados.

Labor and benefits expenses were 36.1% of sales in the quarter, which was 10 basis points favorable compared to the second quarter of last year. We achieved these gains while introducing a new service model to provide guests with an even better restaurant experience, as Greg just outlined.

This rollout added onetime costs related to the training and extra scheduled labor, which impacted margins by approximately 20 basis points in the quarter.

Occupancy and operating expenses were 22.7% of sales in the quarter, which was 70 basis points favorable compared to second quarter of last year. We continue to achieve strong efficiency gains over the prior year from our cost savings initiative and expect further improvements in the second half.

G&A was $20.6 million in the second quarter, in line with our expectations.

Turning to the balance sheet. We ended the second quarter with net debt of $47.3 million, comprised of a debt balance of $63.5 million less cash and equivalents of $16.2 million.

During the quarter, we repurchased and retired approximately 255,000 shares of common stock at a cost of $8.8 million. We currently have approximately $52 million available under our share repurchase program.

Moving to more recent trends. Comparable restaurant sales started the quarter modestly positive. Our sales building initiatives, including recent promotions have been successful at driving incremental traffic as illustrated by our traffic performance far exceeding the Black Box casual dining index in early Q3.

Dollar profit growth is our top success criteria for any promotion. We are very encouraged by the incremental profit flow-through we have been able to generate with recent promotions, including our Pizookie pass.

Looking ahead and assuming recent trends continue, we expect Q3 comp sales in the 1% to 2% range, taking into account recent check and traffic trends and anticipating a regular seasonal pattern.

As a reminder, our third quarter tends to be our lowest sales quarter of the year due to seasonality. Factoring in recent trends and expectations for Q3 comp sales, we expect restaurant level cash flow margin to be in the mid-12% area as we continue to expand our margins over the prior year.

This guidance incorporates a higher level of marketing investment to build additional brand awareness and drive traffic to our restaurants as we noted in last year's Investor Day presentation.

As a percentage of sales, marketing costs will be approximately 50 to 70 basis points higher than Q3 of 2023. Also, food cost inflation has stepped up on certain items recently, which is reflected in our third quarter guidance.

We expect G&A to remain in the $20 million area for Q3. G&A continues to track toward the higher end of our original full year guidance range of $82 million to $84 million and to the lower end of the guidance range when removing approximately $2 million of extraordinary G&A expenses from Q1, which were previously discussed.

Much like Q1 and Q2 as well as our guidance for Q3, we expect margins to continue to expand in Q4 year-over-year as we grow sales through the strategic initiatives we've outlined and make additional progress on our margin improvement initiatives.

In terms of cost savings, our new disposables distributor will be fully rolled out by the fourth quarter. We are also testing a tool for our restaurant operators that uses our AI-based sales forecast at each restaurant and generates a tailored labor schedule down to the hour and day based on expected demand and other criteria that we set.

The early results are encouraging, and we expect to expand the usage of the tool by the fourth quarter and drive additional labor efficiencies. Our goal remains to close the gap to 2019 margins by year-end.

In conclusion, with significant cash flow from operations, expanding margins and a healthy balance sheet, BJ's has the financial flexibility to execute multiple initiatives to enhance shareholder value.

Specifically, we are focused on delivering value to shareholders through sales and productivity initiatives and through our disciplined approach to capital allocation, including new restaurant openings and restaurant remodels, which both continue to generate strong economic returns as well as our share repurchase activity.

We have a clear path to sales and margin growth ahead and our long-term strategy and the strong consumer appeal for the BJ's concept positions us well to continue building on our successes in enhancing shareholder value.

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

[Operator]

[Operator Instructions]. And our first question today will come from Alex Slagle with Jefferies.

[Alexander Slagle, analyst]

I want to see if you could talk more about what you experienced through the May and June holidays, both in terms of consumer demand and the sturdiness of that special occasion dining piece?

And then also just your experience driving throughput, I mean, I guess it's early stages as you are rolling out the elements of the new service model, just any early learnings from what you saw there during those Mother's Day, Father's Day, Graduation periods.

[Gregory Levin, executive]

Yes. Good question there, Alex. I think first off, as we've kind of mentioned in the call, we saw improving trends throughout the quarter coming out of April into May and June.

I would tend to say that around the holiday specifically, there was definitely demand within our restaurants, driving traffic and average check as consumers came out to celebrate at BJ's. So, Mother's Day, Father's Day, graduation weekends were strong for us.

We mentioned setting those records. And as Tom mentioned as well, we did over 140,000. I think it's 441,000 weekly sales average. So, and we said this before, when there is a reason to dine out for a celebratory event consumers come out. They want to go out and celebrate.

There's emotional attachment to coming to sit-down restaurants. And I think BJ's and say, I think I know BJ's provides that for many, many consumers, and that's why we saw it in our business there.

In regards to your second part of your question, we're at the very beginning. We had those inefficiencies that we had to go through. I think you understand our restaurants and the size of our restaurants.

To put more servers on the floor, require more hiring that we had to do. And, in one sense, it ends up with sometimes more people in the kitchen, running and grabbing food and working those transitions out.

What we do know is when we get to our guests sooner and we get that first order in sooner, our Net Promoter Scores go up. They have a better dining experience with us. And that's one of the main reasons for having more servers on there. We know if we get their food and faster. Obviously, the entire experience should be faster.

I would tend to say on this specific initiative, we are probably in the second or maybe the top of the third inning. There's still a lot more for us to do. A lot of it comes down to the teams getting even more and more mature in this process and getting their sea legs under them.

And then, we continue to now monitor it in regards to, as we call, fire first reports and other things to see how we're doing on that productivity.

I think myself and our operations team are excited about this because it really unlocks the throughput in our restaurants that makes us more productive. It gets us thinking about how we can turn the tables at a speed that makes sense for our team members and for our guests. So, we're going to continue down that path.

[Alexander Slagle, analyst]

And just a question on the 3Q same-store sales outlook and maybe the quarter-to-date, are there any dynamics with the calendar shift like Fourth of July holiday moving around and then potential dynamics at play with the Olympics and elections and things like that, that you're looking out for?

[Gregory Levin, executive]

Yes. Look, I'll give you like my perspective on this. Where we are right now, as Tom mentioned, the 1% to 2% seems to be our regional guidance.

The calendar itself is not a great calendar in the sense that you got a July 4 [indiscernible] Friday, some of you open at the weekend. We had the hurricanes kind of in our numbers there. Obviously, as you go through the quarter, it becomes less impactful.

At the same time, and we said this before, conventions, political conventions, are not great for dining out. A certain amount of consumers always want to see certain people speak at conventions. So, those become challenging times during the middle of the week.

And the Olympics usually opening and closing ceremonies are more challenging days overall for us and again, I think people are really interested in seeing what the fashion is of the different countries walking into opening ceremonies and what the fashion is on the closing.

But I think you take those out and look at the underlying consumer. It's pretty consistent with what we saw in Q1, the lower-end consumer year-over-year like kind of at that 50,000 range has kind of reduced their purchasing.

We continue to see that aspect of it. But looking to Q2 versus Q1 as we going even into Q3, we're not seeing any real change in the consumer. We just have to be wary of the calendar.

[Operator]

Our next question will come from Jeffrey Bernstein with Barclays.

[Jeffrey Bernstein, analyst]

Two questions. The first one, just following up from a comp perspective because it does look like, I guess, you're saying in July, you were modestly positive and you're assuming a 1% to 2% for the full quarter, so seemingly a little bit of an uptick.

I was just wondering if you could talk about maybe the industry backdrop behind that because it does seem like peers are being more aggressive with value offers, and it does seem like broader industry trends are slowing.

So, just wondering how you think about the outlook for the rest of the quarter. And within that, just California, in particular, we've now heard from a variety of restaurants that they've actually seen a pretty significant pullback in California, maybe consumer being more cautious at the single these price increases that maybe some of the fast-food chains have been taking.

So, I'm wondering if you've seen any change in your California performance in recent months relative to the rest of the country. And then I had one follow-up.

[Gregory Levin, executive]

Jeff, there's a lot there. So, I'll take some of that. I think Tom can probably provide a little bit more detail on maybe how we're thinking about comp sales through the quarter as well.

When you take a step back on California, I think California did take a step back in April and is slowly moving itself back. There're two things that I think played in April for the consumer. And I think you mentioned one of them. And that is the California minimum wage put sticker shock across all consumers, whether you're in casual dining or QSR fast-casual.

The fact of the matter is there are different dining occasions. And if you went to one place and said, wow, that seems expensive, maybe pull back from another. And I think that initially played into consumers and they had to adjust to it.

I also believe, and this is something that doesn't get talked about as much California, and I find where being a Californian, by the way, California in 2023, had what they call historic rains even though we have the like the same rates in 2024.

And as a result, every tax returns were delayed until September of 2023. So, this year, everybody in California had to file their taxes in April where they didn't last year. That, on top of maybe the minimum increase kind of impacted California consumers early on.

And a little bit of that goes into our thinking about how comp sales will play out through this quarter because in California, most people have now already paid their taxes in September might not be a drag as it would have been a year ago.

So, that comes into our overall cadence in our business. And then we continue to monitor the landscape into value. I think the issue with value that we face and becomes, I think, more challenging as driving comp sales is not necessarily value per se, but it's the amounts of media and marketing dollars that people are spending to tell that message.

So, you're fighting for your voice to be heard out there with the consumers. It's one of the reasons as we look at this quarter that we're going to be increasing that marketing spend just versus quarter-over-quarter from a year ago.

We need to be heard from the consumer standpoint to make sure they continue to come to our restaurants so we can leverage those additional sales. It was part of actually our plan all along. It was to step up in Q3, but it's probably worth about 20 to 30 bps more than what we were thinking before as we enter this quarter.

Tom, I don't know if you have anything to add?

[Thomas Houdek, executive]

Jeff, you asked specifically around California. And we're not seeing any different trends. We've been stronger in California, so we're lapping that. But as we look across the dynamics in our markets, there's nothing noteworthy in California. If we look to Black Box, we're used to outpacing the industry in the home turf. So, nothing really to report.

And one other thing Greg mentioned a lot of the moving parts in California, gas prices have come down a bit, too. So, when you think of just money disposable income in the consumers' pockets, I think we're seeing that tailwind coming in here, too.

[Jeffrey Bernstein, analyst]

And then my follow-up is just on the unit opening side. I think you mentioned you did one this year, so far, you'll do another two, so that will get you to three for this year. But I know, Greg, you mentioned the long-term algorithm in the ideal scenario would be to get to mid-single-digit unit growth.

And with remodels presumably at, I guess, you're saying half the system will be at the new prototype by the end of the year.

So, I'm just wondering how you think about 2025, I know you haven't given formal guidance yet, but presumably, you have some line of sight into openings for next year, where the next year is a year of a big uptick from the 3 to get you anywhere close to that kind of 5%, which presumably you'd need 10 or more.

So, any thoughts around the unit growth outlook looking into '25 or when you think you'd get to that kind of 5% level?

[Gregory Levin, executive]

Yes. Great question. So, we continue to build our pipeline. We've said one thing consistently at BJ getting back to 5% where we wanted to go. It was never going to be a one step forward, just because we want to make sure we do it with quality.

So, getting to think about it being 10, 11, 12 restaurants, our goal would be to stair-step that. We'd have to move to 5% and then to 7% to 8% and kind of move ourselves into that direction to make sure that we're bringing in the right quality in regards to people so that we can execute at that gold standard level that we talk about.

So, as we continue to build our pipeline, we'll evaluate where we want to go for next year. We want to make sure that the two new prototype restaurants that we're doing right now as well hit their returns.

So, when we get into really the September, I guess, the end of this quarter, in October, we'll have more of our plans put together, and we'll kind of give a broader range from there.

That plan then goes to the Board for the Board approval. So, we're kind of working it through that way, but we continue to build our pipeline. But I think for us to get to the 5% growth, it wouldn't have been a 20, 25-year even to begin with as we want to continue to step it up, especially coming off of our current run rate of 30.

[Jeffrey Bernstein, analyst]

But it seems like you're on the path to at least absolute number to be greater than 3% next year, if you're even heading anywhere towards that, like you said, stairstep?

[Gregory Levin, executive]

That's right now within our plans. We continue to evaluate that its remodels because it comes down to the fact that we've got this ability to use our cash flow in numerous ways. One, remodels obviously building restaurants and to enhance shareholder value.

So, ultimately, as remodels come down, as we mentioned over time, had additional capital that can be funneled into trying to star step up restaurant growth with the right quality or if we, in the short term, how to do it more in share repurchases, that's what we would do as well.

[Operator]

And our next question will come from Todd Brooks with the Benchmark Company.

[Todd Brooks, analyst]

Just two quick questions, if I may. One, Tom, you talked about closing the gap to 2019 restaurant-level margin levels by year-end. Can you just elaborate on what you're meaning there? I know Q4 of '19, I think, was a 16% margin quarter for you.

Can you kind of put a framework around this so that we don't give of our skis for the magnitude of restaurant level margin recovery you're looking for in that quarter?

[Thomas Houdek, executive]

Sure. And we would give more specific guidance for Q3. But as we look forward into Q4, I mean, we need to see what the backdrop is at that point. But if we look at last year and where we want to grow it to, we definitely want to see year-over-year improvement continue. So, is it all the way back up to 16%. We have to see what the backdrop is.

We want to keep continuing to close that gap and get as close to that number as we can. So, we're not giving a more specific number to guide to at this point. But given the backdrop, given what we see in both our margin improvement initiatives and what we're able to have line of sight on for margin improvement as well as the initiatives we have to grow top line.

We do still see that path to getting definitely above last year and something closer to where we were in '19.

[Gregory Levin, executive]

Yes. I think, Todd, the big will cut that we continue to look at is really on the commodity side. Even as we go into this third quarter, commodities are inflating more than we would have expected originally. That was kind of in our guidance here as well as the additional marketing that we talked about.

Depending on how those commodities play in, I think is a big wildcard there in regards to the difference on the margins in the fourth quarter. But, as Tom said, we continue to make improvements on our margins and keep moving forward.

[Todd Brooks, analyst]

My second question, Greg, you were talking about the throughput initiative and kind of second, third inning in the process. Can we talk to maybe where you stand now on table turns at peak periods relative to before you start the initiative?

And then when you look to the end of the road after all the work is done with this initiative, just can you frame up a magnitude for us of how much you would look for table turns to be improving from it?

[Gregory Levin, executive]

Yes. Todd, it's a great question. I actually don't have our table turn information in front of me, especially at the peak periods.

What I would tell you is, our goal is really not so much on the peak periods, but it's to expand the shoulders. So that you know that you go to BJ's and it's not an hour and 5 dinner experience when you get to our 8:00 thinking I'm coming home at 9:30, but that we can reduce that down into kind of somewhere in the 45 minutes, give or take a little bit.

We know some of the areas that we have an opportunity on believe it or not, and I think people understand this. One is pay at the table. We know in a couple of restaurants are putting down a device, and we know people that use the QR code, they save anywhere from 7 to 10 minutes on the experience.

We know when our servers get to our guests sooner, some here is in that 4-minute time, we're also saving summers in the 3 to 4 minutes.

And then we're also, as I said, looking at our kitchen display system and where things are lined up for firing within the kitchen so that all the food comes out at the same time. There's a couple of areas there that are some big unlocks that are actually going to take 1 to 2 to 3 minutes off of that.

So, we're tending to look at that overall cook time and trying to move that down versus purely on the table turns. I'm looking at table turns directly at peak meal periods.

We know some of the changes that we made. We made specifically from Mother's Day and Father's Day because we knew how the guests would come in from the prior there. And, as I said, not only are we able to grow average check on those days, which is great.

We grew traffic, significant traffic on those days by making a couple of adjustments, and that's what we want to continue to kind of follow through here over the next couple of months before we roll these out.

[Operator]

And our next question will come from Nick Setyan with Wedbush Securities.

[Nick Setyan, analyst]

So, I just kind of want to walk through Q3 and Q4 or any pricing expectations?

[Thomas Houdek, executive]

Sure. So, we'll have another round of pricing in late September of about 90 bps, and that's rolling over something in that 2% area from a year ago.

So, as we walk through Q3, we'll be in the mid or call it, low 3% area. And then in Q4, we'll be carrying at a kind of mid-2% as the timing works in terms of rolling on and rolling off pricing?

[Gregory Levin, executive]

Nick, the other thing just bigger picture is, and we've seen this throughout this year is the way our shift in our business is happening as well, there's a little bit of a negative mix shift or drag on our total pricing.

And the reason for that is, we're seeing improved traffic and sales trends at late night maybe a little bit in the midafternoon, and that ends up with a lower average check than what we're seeing at the dinner time side of things.

So, we start to look at that, we've seen a little bit of a kind of 50 bps or something, even a little bit more on times on average check. And we would expect that to continue this year.

[Nick Setyan, analyst]

So, this 40 to 60 bps uptick in terms of year-over-year marketing spend, does that continue into Q4 as well? Are we expecting elevated level of marketing in Q4 versus 23 Q4?

[Thomas Houdek, executive]

It balances out more in Q4. It will still be a little bit up, but nothing like Q3 year-over-year.

[Nick Setyan, analyst]

The COGS inflation commentary, I mean, is that just mainly cheese, what else is going on?

[Thomas Houdek, executive]

Right now, the two big ones are bone-in chicken wings and avocados. So, those are the two that -- because as you know, a lot of our food is fixed for the year or for the quarter, but there's certain produce and some of our wrong floats to market.

So, those are the two that we've seen step up to a degree. We will also be, as we step into Q3, we've got a new meat contract. So, if we look year-over-year, we're still seeing some really nice savings in red meat, but is that we have contracts that we are able to fix that for some period of time, but we'll see that resetting in a month or so.

So, we'll see a little tick up there as well.

[Nick Setyan, analyst]

And then I guess, like in terms of just labor, it sounds like maybe a little bit less leveraged than we were expecting going into this quarter. Is that simply just the spending around the labor training investments?

[Gregory Levin, executive]

Yes. I mean, Tom mentioned it, 20 to 30 bps of labor improvement that was lost in kind of the inefficiencies of the new system.

I would tend to tell you that the numbers of efficiency are looking significantly better here in P7, which is July for us from that standpoint. But we want to make sure, again, we're taking care of the gas driving top line sales. This is the system that we're putting in place was never put in place for labor savings.

So, you never heard us come on the call and say we're making XYZ's going to save X dollars. This is about driving throughput driving top line sales, continuing to improve on gracious hospitality and our gold standard level of operational excellence.

And I think as they get their sea legs and we'll continue to get that. As we go into Q3 and Q4, we do now start to lap the smaller menu because if you remember the smaller menu rolled out in July of a year ago.

So, some of the benefits that we were getting there with less prep, et cetera, we lap year-over-year. But generally speaking, we continue to see what I would call improvements in our productivity measures around labor. And we want to make sure, again, we're doing it at the right level that's driving improved guest service and hospitality.

[Operator]

Our next question will come from Sharon Zackfia with William Blair.

[Sharon Zackfia, analyst]

Can you talk about the labor environment? I know in California, you were worried that you might see an uptick in your labor costs, even though you're not directly impacted by the FAST Act. And I'm also curious just kind of in a broader country, are you seeing better quality labor? I know there's increased labor availability, but I'm wondering about the quality of the labor that you're getting.

[Thomas Houdek, executive]

Sure. I'll take that one, Sharon. And, yes, we mentioned this last quarter, we didn't mention it this quarter, so I can bring it up now. We continue to measure our California labor to see our retention rates to make sure with the California FAST Act where minimum wage stepped up in other types of restaurant companies to see if we've seen any change in either our turnover rates or wages, anything like that.

And happy to report, still no. As we track it, looking year-over-year and back to even '19 levels, both California and the rest of the system are still in a better place than we were in 2019 as well as last year. And in terms of wage growth, we did talk about the food cost inflation. We're actually didn't mention on the hourly side, but we're still sitting in kind of that 3% to 4% range, and that's consistent with Q1.

So, we saw very little wage inflation from Q1 into Q2. So, all signs pointing to this, this has worked for us as we've given some increased wages to some certain elements of our restaurant, but it's balanced out and we have a really great retention rates and to your point on quality, the longer team members are with us, the better execution we see, and that's the case.

So, we have less reasons to be hiring all the time. But, yes, I think the pool out there is stronger, but we're able to retain our team members more. So, it is, I would say, as good of a labor hiring environment as we've seen in the recent past.

[Sharon Zackfia, analyst]

And then, Greg, just a question. I know you haven't committed to when you're going to reaccelerate growth. But how far in advance of acceleration do you have to start building the management pipeline?

[Gregory Levin, executive]

Yes. Somewhere in the 12-month time frame you really have to look at it. The challenge on the pipeline is a little bit different. And, Sharon, your perfect example being out there in Illinois or in the Chicago market.

That's going to be more challenging to build that manager pipeline. So, we want to be more ahead of that in the 12-month time frame.

So, the team really understands BJ's trying to find somebody to move to a new market or a satellite market is always more difficult and we'd love to build that in. Building restaurants in Texas, California, Arizona, some of those markets, the pipeline time frame is a little bit shorter.

So, on average, and I know this is really an average, you're looking at somewhere in the minimum of 6 months, but more likely you want to be about 12 months out.

[Sharon Zackfia, analyst]

And then last question for me. There was kind of a big jump in other income in the quarter. Was there something unusual in there? Or what was kind of this $2 million sequential increase?

[Thomas Houdek, executive]

Yes. There was an out-of-period release that we had of some accrual related to tax credits. So, yes, we'll outline it with more detail in the queue, but that's, yes, just out-of-period benefit there.

[Operator]

And our next question will come from Jon Tower with Citigroup.

[Unknown Analyst]

This is Karen will pass on for Jon. Just two for me. One, it looks like mix is still running a little bit negative. Is that still really being attributed to just shift in dayparts with late night coming back? Or is there something new coming into that in terms of track management?

And then just the Pizookie promo, how should we think about the accounting behind that? Is the kind of giveaway of free Pizookie going to be reflected in that spike in advertising spending? Or would it be showing up more on like a part of like a sales cost a sales dynamic?

[Thomas Houdek, executive]

Sure. So, on the check side, the dynamic we saw in Q1 pricing to check. We saw that gap shrink into Q2. We are still seeing better comp dynamics in our late-night daypart and there's about a $10 average check difference, lower in late night. So, great that we're growing the traffic, but there is some check headwind to that as it averages in.

The other piece is alcohol, where we check it year-over-year as well as back to '19, and we continue to see some headwind in terms of what we sold last year, but more kind of normalizing back to 2019 levels than anything else. So, those are the two main pieces that are the delta between our check growth and the pricing.

And to your second question, the Pizookie promo. So, there is a modest amount of sales income. We take when the membership is paid for the month. But then going forward, it is just cost of sales.

So, the idea is and we're seeing this, that when these are used, they'll come in and they'll spend on whatever they want to eat plus to get their Pizookie for free. So, we'll have the sales for the rest of their meal, then they'll have the we'll have the costs associated with the Pizookie that gets added to their check.

So, we'll see the incremental sales off of the whole check that they spend, but then the Pizookie just will flow through as cost of sales.

[Gregory Levin, executive]

So, Karen, to that point, it's a great question. That is, that type of promo drives traffic into our restaurants. And as Tom mentioned, they end up with a free poking on their meal, so it's a lower average check.

So, when we start to think about that mix, that mix would continue to be negative in Q3, like it was in Q1 or Q2. But we get that increasing fancy and increasing guests to drive overall throughput in our restaurant.

[Operator]

And our next question will come from Andrew Wolf with Loop Capital Markets.

[Andrew Paul Wolf, analyst]

I'm actually with CL King. I want to ask about the increased marketing spend, the sequential increase. And just tie that into what you called out and discussed at the Investor Day, just to see if it's consistent with the plans you talked about at the Investor Day, both in the amount is about the same and secondly, the nature of it, if I recall back then, it was going to be a lot of digital marketing and create trial.

And I just wanted to check to see, basically, what I'm getting at is it higher? Or is the nature of the spending a little different given the promotional environment and the amount of spending that maybe competitors are putting out there in marketing as well. So, I'm just trying to get to the nature of the spending and the amount.

[Gregory Levin, executive]

Yes. So, Andrew, great question. And, yes, I'd probably say it could be a tad of all of the above. It's the same channels in the sense of where we were from TV, connected TV and digital. If you think about also the Investor Day, we talked about this word of making Pizookie, a household name, our dessert there.

So, we've got additional funding going around our Pizookie pass that goes into Q3 because we're trying to build on that on the Pizookie brand and the ubiquity that we have in that. So that provides top of mind awareness for BJ's.

And then as we looked at it as well, we also looked at a couple of other markets that we decided to kind of add in there. So, there's a little bit of an expansion of one additional market and a couple of additional digital areas or digital markets that we have from year-over-year.

So, that plays into it. But a lot of this is actually kind of in our plans to begin with. And then as we think about it because we're still kind of crafting some of the communication there, the question will be where that communication is going to be. Some will be on the Pizookie pass and the Pizookie ubiquity that we talked about.

Ethers will be more price point specific on some of the great value that we already have in our business, whether it's some of the everyday value or daily brewhouse specials. I think in phase environment, you're seeing that price point be very, very important.

So, instead of it being more of a branding pet commercial, which we would use a Pizookie per se. It would be a little bit more price point specific around Davy Brewhouse specials or some of our everyday value menu items that we have.

[Andrew Paul Wolf, analyst]

And is the latter may be a bit of a change or adaptation to the what's going on, more price points than you might have planned earlier?

[Gregory Levin, executive]

Yes, probably. I mean, the reason I say that somewhat hesitantly is we don't necessarily plan what the exact message is going to be a year out because we have different things that we kind of look at.

But I think based on the kind of consumer environment, as I mentioned earlier, we're seeing, obviously, a lot of media being spent to drive awareness. Most of it is around a value play.

We're not going to be doing a crazy deep BOGO value play or something like that out there, but it's probably around a little bit more price certainty on some of the menu items that we have in our restaurants.

[Operator]

And this will conclude our question-and-answer session, also concluding today's call. We'd like to thank you for attending today's presentation. And at this time, you may now disconnect.