Stop Panicking: BJ's Third Quarter Was Not That Bad

Shares of BJ's Restaurants (NAS: BJRI) , the pizza 'n' beer restaurant operator with operations in 14 states, were down nearly 20% on Friday -- just hours after the company released its third-quarter earnings.

You wouldn't guess, given the sell-off, that BJ's had a decent quarter amid substantial challenges. On the call, CEO Jerry Deitchle mentioned heavy headwinds including the Summer Olympics (people staying home to watch it, that is), the distraction of the election, higher gas prices, Hurricane Isaac, and even the lack of any big summer hits at the box office.

Despite all this, BJ's revenues for the quarter were up 16% to $175.2 million, net income rose 8% to $6.8 million, and earnings per share came to $0.24 versus $0.22 in third-quarter 2011. Same-store sales were up 2.3%. That's BJ's 11th consecutive quarter of same-store sales growth.

New restaurants and a menu update
The company opened four new restaurants -- which contributed 87% of the revenue growth -- and plans to open another five stores in the fourth quarter (and as many as 17 in 2013, including some not far from where I'm writing this article at Motley Fool HQ). Average sales per restaurant increased 2%.

BJ's recently completed menu update seems to have gone down well with BJ's customers. CEO Dietchle said of it:

We are already enjoying a 6% lift in total pizza purchase incident rates since our menu update in late September. And as I think most of our investors know, pizza has a slightly higher gross profit margin for us. So the more we sell, the better impact we earn on our total gross profit margin going forward.

Beer purchase rates are also up 4%, the payoff from BJ's bartender and server training program known as Beer Master.

Cause for enthusiasm?
Sounds like a lot of good news, doesn't it? Cautious enthusiasm may be in order.

Even with that double-digit revenue growth, BJ's missed its own estimates. "Total revenues for the third quarter, even though they were up a strong 16% compared to the same quarter last year, were slightly less than we had internally anticipated, principally due to the headwinds," said Dietchle on the call. "We're not alone on that factor in the casual dining space, as many restaurant analysts and investors know. But that also means that the related flow-through benefit to our bottom line for the third quarter was also a little less than we internally anticipated."

Margins got crunched by about 60 basis points, all told, on increased occupancy costs and the cost of the new training programs and menu updating costs. Of course, while the company didn't realize quite as much of a lift from these programs as it expected to, these programs should still contribute to margin expansion over time.

Buy, sell, or hold BJ's?
Also contributing to the near-20% drop in share price is the fact that BJ's results also fell short of analyst estimates -- by about $0.04 in terms of earnings per share. And, based on the results, at least one investment firm downgraded BJ's Restaurants to Neutral from Outperform.

So is it time for BJ's shareholders to panic? I think not. In fact, now could be a good time to add to one's position or start a position by buying the sell-off.

The whole casual-restaurant sector is experiencing challenges, with competitors like Dine Equity (NYS: DIN) , operator of Applebee's and IHOP, and Bloomin' Brands (NAS: BLMN) , operator of Outback Steakhouse, struggling to woo customers and win share in a crowded market. But unlike those mature, and possibly passe, competitors, BJ's has its best days ahead of it. Its growth story remains on track, and the supposed misses this quarter are more supposed than real misses. Disagree? Let me know in the comments section below.

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Motley Fool analyst Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. The Motley Fool owns shares of BJ's Restaurants. Motley Fool newsletter services recommend BJ's Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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