Economic Indicators
The war chest is bulging at BJ’s Restaurants. So are the numbers.

By David Farkas

As far as first days go, the new BJ’s Brewhouse in Corona, Calif., about 45 miles southeast of downtown Los Angeles, is off to a fine start. A bevy of new servers, a week’s training under their belts, beam at guests. Mouthwatering pizzas, sandwiches and salads fly out of the kitchen. And customers stream into the stylish restaurant, filling nearly every seat an hour after the opening. What more could management want?

How about getting the boss’ order right? “I asked for the Caesar salad with blackened salmon, and she brought me shrimp,” BJ’s Restaurants Inc. Co-Chairman Paul Motenko quietly complains to a floor manager after the meal. “I mean, I Iike shrimp. But I really wanted salmon.”

Still, Motenko scarcely seems unhappy as he looks around the crowded eatery. “I like the fact that the restaurant is almost full,” he declares.

So do investors, who at $19 a share value the company at 55 times forward earnings. They’ve also driven up the share price 28 percent since January. In mid-April, BJRI was just a dollar off its 52-week high. The stock price has never been higher since the Huntington Beach, Calif.-based casual-dining chain went public late in 1996.

The attraction? High volumes and significant potential for disciplined expansion under a seasoned management team lead by CEO Jerry Deitchle, the former president of The Cheesecake Factory who signed on in February. The 8,000-square-foot prototype units, for example, ring up $135,000 a week during their honeymoon period, which lasts several months, before leveling off around $104,000, Motenko says. Annualized, he adds, the restaurants produce $5.1 million.

Those volumes have driven revenues upward. Last year the company posted sales of $129 million, a 20 percent gain over ’03. This year analysts remain bullish on BJ’s, expecting revenues to climb to $154.8 million, fueled by new store openings and modest gains in comparable sales.

Says Roth Capital Partners analyst Tony Brenner: “BJ’s is a portable concept that would appeal to consumers in any market. It offers diners an exceptional price value.”

Profit Motive
Those sums are even more surprising given an $11 check average, well below P.F. Chang’s China Bistro and The Cheesecake Factory, to which BJ’s is now being compared by analysts. Chicago-style, deep-dish pizza, which accounts for more than a third of sales, keeps tickets low and margins high. Combine pizza’s 80 percent profits with those from BJ’s beers (10 units brew and distribute it), and you’ve got the makings of a very tidy restaurant-level business.

Think restaurant-level cash flow of about 20 percent, and you’ll understand why Deitchle appears to be champing at the bit. “For a company this relatively young, their unit economics are absolutely outstanding. There’s 20 percent cash-flow margins in the business model, and we haven’t yet realized the traditional leverage you get with growth,” he marvels.

Accounting Principles
Credit a couple of CPAs named Paul Motenko and Jerry Hennessy. As BJ’s auditors, they managed the company for its founders from 1991 to 1995, when they paid $3.5 million in cash and notes for the five small pizza-and-grill spots that averaged 2,500 square feet. The duo figured the restaurants could become valuable entities if volumes were large enough. That they were accountants and not veteran operators didn’t seem to matter.

“The CPA background is great for being in the restaurant business for a couple of reasons,” Motenko says. “One is sometimes people get carried away with the restaurant part and forget it’s really a business.” Deitchle, incidentally, is a CPA, as is the company’s largest shareholder, William H. Tilley, the owner of Jacmar Co., BJ’s longtime distributor.

The accountants-turned-restaurateurs, however, had little cash to invest in new, larger restaurants. To solve the problem, they raised $6.8 million selling 1.8 million shares of stock and issuing 2 million warrants in the October ’96 IPO. At the same time, they acquired a bankrupt pizza chain in Oregon, intending to convert them to BJ’s restaurants. “[The underwriters] said we were too small and suggested we make an acquisition. You know, experience substantial increases in revenues and live happily ever after,” Motenko wryly recalls. Bad advice. Today, the company operates just three of the original 26 restaurants.

Motenko and Hennessy had better luck with their restaurant featuring a microbrewery, also opened in October 1996 in Brea, Calif. Moderately successful at first, the restaurant has performed well over the years. So have the other larger format units, which together have posted only positive monthly same-store sales. The company began using ground leases and a prototype building in 2002, funding growth with the $36.3 million raised after the IPO’s warrants were exercised.

The capital also allowed Motenko and Hennessy to bulk up company infrastructure, hiring real estate, culinary and brand executives in the process.

Enter Deitchle
Deitchle, who joined BJ’s Restaurants after a brief stint as president of Austin, Texas-based Fired Up, a private company that franchises the Italian dinner-house chain Johnny Carino’s, says the chance to run a fast-growing public company was too good to pass up.

“CEO opportunities in this industry with public companies with outstanding growth potential are far and few between,” he says, adding that he remains on Fired Up’s board. Industry observers also suspect the 52-year-old executive desired a bigger role than president, the title he held at The Cheesecake Factory after seven years as CFO.

Deitchle, who managed millions in equity transactions for The Cheesecake Factory, already has a significant war chest thanks to a March private placement that added $42.6 million to BJ’s balance sheet. Cash now on hand: a tidy $59 million. Oh yeah, the company has no debt other than its leases.

“Now they have the flexibility to grow the brand,” says RBC Capital Markets analyst David Geraty, who is recommending the stock.

The strong balance sheet reminds Deitchle of his former employer, The Cheesecake Factory. “It’s a model we used in my prior business,” he says. “It gives us maximum flexibility to consider any real estate that might be offered us—whether to buy it outright or lease the site. We have the flexibility to consider acquisitions for conversion of multiple sites at one time.”

Officials believe there’s room for 300 BJ’s restaurants. Shareholder Tilley thinks BJ’s can grow to 1,000 units by expanding smaller pizza-and-grill units in addition to the larger prototype restaurants. It’s a gambit management hasn’t announced publicly. This year, the company will add at least eight units, mostly in existing markets, and as many as 11 in ’06.

The company is promoting a disciplined and controlled expansion, hoping not to run out of qualified managers. Motenko admits it’s getting harder to find them as more units open. There are only a handful of chains with volumes as high as BJ’s, and they’re also growing, he frets.

Motenko and Co-Chairman Hennessy are happy to let Deitchle take control of the crucial operations and finance departments. “We didn’t go out looking for a CEO,” Motenko explains. “We were specifically looking to hire Jerry Deitchle.”

Declares Hennessy: “Jerry’s a partner. He understands us as if we’ve known him a lifetime.”

Meanwhile, Motenko oversees culinary, marketing and corporate culture while Hennessy remains involved in site selection and building design. Both still attend strategy meetings.

Apart from leverage issues, which Deitchle says can be resolved by updating food- and labor-cost technology, he wants to process more customers without affecting the quality of the food or service. It’s a task all high-volume restaurants address in a variety of ways, from beeper-toting guests to headset-clad hostesses. Getting a table at BJ’s can take an hour or more on weekends.

Slow Cooking
For example, Deitchle suspects food is coming out of kitchens too slowly. “I don’t want to get ahead of myself because I haven’t had the chance to work with our operators, but suffice it to say that there are more efficient ways of running the expediter position in our restaurants,” he says.

Coming soon: a kitchen display system to speed up order prep. He’s also scrutinizing front-desk and seating methods in an effort to boost daily table turns, estimated at 4.4 by Geraty. Deitchle believes the restaurants should reach five turns or more without diners feeling rushed once new systems are in place.

Some might describe much of the stuff now preoccupying Deitchle—the supply chain, information technology and margins—as low-hanging fruit, problems he helped resolve years ago at the $2 billion Cheesecake Factory. Once he gives the marching orders to the troops, he gets to sit back and watch the needles move up.

If only. Deitchle and Motenko can imagine a scenario in which BJ’s is slowly forced to dummy down the concept. And not for rube customers, but for employees who lack the skill to operate sophisticated systems. “In the old days, we could muscle our way through it with five or six restaurants. With 40 you need people at the unit level who are really highly qualified,” Motenko says.

Deitchle talks in terms of managing four “pipelines”: capital, real estate, infrastructure and manpower. “Oftentimes when you start to manage your growth,” he explains, “the pipeline that falls short the fastest is the availability of qualified restaurant managers to execute your concept correctly. Then you start seeing a natural dumbing down occur. A few companies have resisted that. If anything, they have thrown additional resources onto talent recruitment, recognition and development assessment.”

BJ’s sees itself among the few, driving down hourly turnover with a 2-year-old training program designed to enhance service. (See “Direct to Video,” April 15, 2005, Chain Leader.)

Of course, there will always be goofs like Motenko’s lunch order in the Corona restaurant, about which he’s philosophical. “BJ’s is a complex concept,” he sighs. “You don’t necessarily get it in a week.”