Some, but not all, significant factors that could prevent us from achieving our stated goals are set forth in Part I, Item 1A of this Annual Report on
Form
10-K
and include, but are not limited to:
These cautionary statements are to be used as a reference in connection with
any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise
addressed in connection with a forward-looking statement or contained in any of our filings with the U.S. Securities and Exchange Commission (SEC). Because of these factors, risks and uncertainties we caution against placing
undue reliance on forward-looking statements.
assumptions underlying forward-looking statements are reasonable on the dates they are made, any of the assumptions could be incorrect, and there can be no guarantee or assurance that
forward-looking statements will ultimately prove to be accurate. We do not have any obligation to modify or revise any forward-looking statement to take into account or otherwise reflect subsequent events or circumstances
arising after the date that the forward-looking statement was made. For further information regarding the risks and uncertainties that may affect our future results, please review the information set forth below under Item 1A. Risk
Factors.
GENERAL
As of February 27, 2017, we owned and operated 189 restaurants located in the 24 states of Alabama, Arizona, Arkansas, California, Colorado, Florida,
Indiana, Kansas, Kentucky, Louisiana, Maryland, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Virginia and Washington. Each of our restaurants is operated either as a BJs
Restaurant & Brewhouse
®
, a BJs Restaurant & Brewery
®
, a BJs Pizza & Grill
®
, or a BJs Grill
®
restaurant. Currently, the BJs Restaurant &
Brewhouse
®
format represents our primary future expansion vehicle. Our proprietary craft beer is produced at several of our BJs Restaurant & Brewery
®
locations, our Temple, Texas brewpub location and by independent third party brewers using our proprietary recipes. Our BJs Pizza & Grill
®
restaurants are smaller format, full-service restaurants relative to our BJs Restaurant & Brewhouse
®
and BJs
Restaurant & Brewery
®
locations and reflect the original format of the BJs restaurant concept that was first introduced in 1978. Our BJs Grill
®
restaurant is a slightly smaller footprint restaurant, compared to our BJs Restaurant & Brewhouse
®
format, featuring all
the amenities of our Brewhouse locations.
The first BJs restaurant opened in 1978 in Orange County, California, featuring Chicago style deep-dish
pizza with a unique California twist. Over the years we expanded the BJs concept from its beginnings as a small pizzeria to a full-service, high energy casual dining restaurant with a broad menu including our BJs
award-winning,
signature deep-dish pizza, our proprietary craft and other beers, as well as a large selection of appetizers, entrées, pastas, burgers and sandwiches, specialty salads and desserts, including
our made to order, warm pizza cookie dessert, the Pizookie
®
.
In 1996, we introduced our
proprietary craft beers when we opened our first BJs Restaurant & Brewery
®
in Brea, California. Today all of our restaurants feature our award-winning, proprietary craft beers,
which we believe showcases the quality and care of the ingredients we use at BJs. Our high-quality, craft beers further differentiates BJs from many other restaurant concepts and complement our signature deep-dish pizza and other menu
items. Our beers have earned over 150 medals at different beer festivals and events, including 34 medals at the Great American Beer Festival. We also offer as many as 30 guest domestic and imported craft beers on tap, in addition to a
selection of bottled beers in our restaurants. Our large and unique beer offering is intended to enhance BJs competitive positioning as a leading retailer of beer in the casual dining segment of the restaurant industry.
We compete in the casual dining segment of the restaurant industry, which is a large, highly fragmented segment with estimated annual sales in the $100+
billion range. The casual dining segment has become a fairly mature segment of the restaurant industry. According to some industry analysts and observers, the annual rate of sales growth for the segment has been gradually decreasing as a result of
increased competition from innovative quick-service and fast casual restaurant concepts and other food-away-from-home retailers, a leveling off of certain favorable demographic trends (the number of two wage-earner households, etc.), and
a perceived over-supply of casual dining restaurants compared to demand. We believe that, in addition to these factors, the segment has suffered from low levels of innovation and a general reduction in the overall quality and differentiation of many
of the larger, more mature mass market casual dining chains that collectively operate several thousand restaurants.
3
In contrast to our mass market casual competitors, we believe that the BJs restaurant concept offers
consumers a higher quality, more contemporary and approachable casual plus (or premium casual or polished casual) dining experience. The term casual plus typically refers to a competitive position that
provides greater quality and differentiation when compared to the more mature, mass market casual dining concepts with average customer checks of $12.00 to $18.00, but not necessarily as extensive as the upscale casual concepts that
typically have average customer checks in excess of $18.00. Accordingly, our primary business objective is to continue our national expansion program as a casual plus restaurant company and attempt to capture additional market share in
the segment over time. Additionally, we continue to evolve our existing restaurant base by introducing a series of initiatives to drive profitable sales and traffic growth while continuously improving the customer dining experience.
Our Internet address is
http://www.bjsrestaurants.com
. Electronic copies of our Annual Report on Form
10-K,
quarterly reports on Form
10-Q
and current reports on Form
8-K
are available, free of charge, by visiting the Investor Relations section of our website at
http://www.bjsrestaurants.com
. These reports are posted as soon as practical after they are electronically filed with the SEC. We caution that the information on our website is not part of this or any other report we file with, or furnish to,
the SEC.
THE BJs RESTAURANT CONCEPT AND MENU
Our primary growth objective is to expand the BJs casual plus restaurant concept nationwide and to consistently deliver the BJs dining
experience at the BJs Gold Standard of Operational Excellence level with our genuine commitment to passionately connect with every customer, on every visit, through the flawless and relentless execution of every detail during every
shift to create and keep fanatical fans of BJs concept and brand. We believe that by delivering upon this commitment to our customers, we will have the best opportunity to generate significant repeat business and capture
additional market share in the casual dining segment of the restaurant industry. To achieve these objectives, we plan to focus on the opening of additional BJs Restaurant &
Brewhouse
®
format restaurants in new and existing markets in a carefully controlled manner.
Our
signature menu offering is our deep-dish pizza, which was introduced in 1978. Our unique version of deep-dish pizza is unusually light, with a crispy, flavorful, bakery-type crust. Our pizza is topped with high-quality meats, fresh vegetables and a
blend of five cheeses. During 2016, total pizza sales represented approximately 13% of our total restaurant sales.
In addition to pizza, we have a broad
menu featuring appetizers, specialty salads, soups, pastas, sandwiches, entrées and desserts. All of our menu items are prepared to order using high-quality ingredients. This broad menu, which we continually evolve, is an important factor in
our differentiation from other casual dining competitors. Over the last several years we have continued to evolve and differentiate our menu offerings, including a Snacks and Small Bites menu category, featuring small plate appetizers
and salads and a lower calorie and better for you menu category called Enlightened Entrées
®
. In fiscal 2016, we introduced over 20 new menu items including such customer
favorites as our Spicy Peanut Chicken with Soba Noodles, Derby Cobb Salad, Piadina and Grilled Cheese sandwiches and our new Monkey Bread Pizookie. Our menu entrées generally range in price from $6.95 to $23.50. We estimate that our average
per-customer
check in fiscal 2016, including beverages, was approximately $14.50. Our extensive menu and moderate pricing allow us to appeal to a variety of customers and dining occasions, including everyday lunch
and dinner, special occasions, and late night business.
Our large, flexible kitchens and bars allow us to adapt to changing consumer tastes and trends
for food and beverages. Generally, we evaluate our menu offerings and prices two to three times a year, and we may add, delete or modify certain menu offerings at those times. Substantially all prospective menu and beverage offerings are initially
evaluated by our internal menu development team and then tested in selected restaurants before any company-wide rollout.
In addition to introducing new
menu items, we consistently evaluate our existing menu and our current operating procedures to improve the quality of our offerings, menu execution and customer service. We believe that reducing unnecessary complexity will improve the consistency
and speed of service in our restaurants, which in return will enhance profitability and customer service and provide additional future menu capacity for innovation in our restaurants.
All of our restaurants feature our award-winning, proprietary freshly brewed (not pasteurized) craft beers, which we believe not only differentiate us from
many other restaurant concepts, but also enhance our ability to provide greater
4
quality and unique experiences to our customers. Approximately 8% of our total restaurant sales in fiscal 2016 consisted of our proprietary craft beers. We also offer as many as 30
guest domestic and imported craft beers on tap, in addition to a selection of bottled beers in the majority of our restaurants. Our broad and unique beer offerings are intended to enhance BJs competitive positioning as a leading
retailer of craft beer in the casual dining segment of the restaurant industry. We source our beers using a combination of our internal brewing operations located at our Restaurant and Brewery locations and our brewpub locations in Texas as well as
through qualified independent third party brewers. During fiscal 2016, approximately 40% of our proprietary craft beer was produced at our internal brewing operations and then distributed to our restaurants in a hub and spoke fashion.
The remaining 60% of our proprietary craft beer was produced by other qualified independent third party brewers using our proprietary recipes. During fiscal 2016, our
in-house
brewing operations produced
approximately 25,000 barrels of beer, and independent third party brewers produced approximately 36,000 barrels of beer. We also offer a selection of popular wines and spirits for sale in our restaurants. Alcoholic beverages, including our craft
beers, represented approximately 21% of our total restaurant sales in fiscal 2016.
RESTAURANT OPERATIONS
Based on internal and publicly available data, we believe that our larger format brewhouse restaurants, on average, generate relatively high customer traffic
per square foot compared to many other casual dining concepts. Therefore, we have implemented operational systems and procedures to support our desire to run our restaurants quality fast, particularly at peak dining periods, in order to
effectively and efficiently serve every customer. The typical management team for a BJs restaurant consists of a General Manager, an Executive Kitchen Manager and three to five other managers depending on the sales volume of each restaurant.
The General Manager is responsible for the
day-to-day
operations of their restaurant, including hiring, training, and the development of personnel, as well as for sales
and operating profit. The Executive Kitchen Manager is responsible for managing food quality and preparation, purchasing, inventories and kitchen labor costs. All of our restaurants prepare detailed monthly operating budgets and compare their actual
results to their budgets. We also measure the productivity and efficiency of our restaurant operations using a variety of qualitative and quantitative statistical indicators such as Net Promoter Scores, kitchen ticket times, actual versus
theoretical food waste, items produced or sold per labor hour, controllable operating costs per customer served and other activity-based measures.
New
restaurant managers are required to successfully complete an
11-week
comprehensive advanced management training program dedicated to all aspects of the operation of our restaurants including both
restaurateuring and restaurant business-related topics. Our restaurant management training program is directed by our Vice President of Operations Talent Development and is closely monitored by our field supervision team. We continuously review our
training curriculum for our new managers and existing hourly employees and restaurant managers.
The General Manager of each restaurant reports to a
Director of Operations or an Area Vice President, who reports to a Regional Vice President or a Senior Regional Vice President. Additionally, we have Directors of Kitchen Operations who oversee the food quality and safety, kitchen efficiency and
consistency in our restaurants and help educate, coach and develop our kitchen managers. Our Directors of Kitchen Operations report to the Vice President of Culinary and Kitchen Innovation. Our Regional and Senior Regional Vice Presidents report to
our Executive Vice President of Operations who oversees all aspects of restaurant operations including kitchen and bar operations, restaurant facility management, new restaurant openings and the
roll-out
of
key operational initiatives.
We carefully select, train and supervise our restaurant-level employees (employees). Each restaurant typically
employs an average of approximately 120 hourly employees, many of whom are paid at the statutory minimum wage level and work part-time. Our goal is to staff our restaurants with qualified, trained and enthusiastic employees who desire to be an
integral part of BJs fun, premium casual atmosphere and, at the same time, have the passion, intensity, work ethic and ability to execute our concept correctly and consistently on every shift. Prior experience in the restaurant industry is
only one of the qualities management looks for in our restaurant employees. Enthusiasm, motivation, dependability, integrity, and the ability to interact well and connect with our customers and correctly execute our concept are some of the key
qualities of BJs management and employees.
In order to maintain our high standards, all new restaurant hourly employees undergo formal training
from certified Employee Instructors at each restaurant. Our Employee Instructors oversee the training by position for each new hourly
5
employee and are also utilized to support our new restaurant openings. Our hourly team goes through a series of
in-depth
interactive and automated training
for their respective positions. Our future growth and success are highly dependent upon our ability to attract, develop and retain qualified restaurant management and hourly employees. We attempt to accomplish this by providing our employees with
opportunities for increased responsibilities and advancement as well as performance-driven incentives based on both financial and customer satisfaction metrics. We also support our employees by offering what we believe to be competitive wages and,
for eligible employees, competitive fringe benefits (including a 401(k) plan with a company match, medical insurance and dining discounts). Additionally, our General Managers, Executive Kitchen Managers, Directors of Operations and Directors of
Kitchen Operations are eligible to be selected to participate in our Gold Standard Stock Ownership Program that operates under the authority of our 2005 Equity Incentive Plan (the Plan). This program, which is intended to be a long-term
incentive program, provides for equity-based awards. Participation in the Plan requires extended service in good standing with us (generally three to five years).
Excluding our BJs Pizza & Grill
®
restaurants, our typical restaurant hours of
operations are generally from 11:00 a.m. to 12:00 a.m. Sunday through Thursday and 11:00 a.m. to 1:00 a.m. Friday and Saturday. Our restaurants are typically open every day of the year except for Thanksgiving and Christmas. Most of our restaurants
currently offer either
in-house
and/or third party delivery service. Additionally, all restaurants offer call-ahead seating,
on-line
ordering for customer
pick-up
and reservations for large parties.
RESTAURANT SITE SELECTION AND EXPANSION OBJECTIVES
Our BJs Restaurant & Brewhouse
®
format is currently expected to represent the vast
majority of our planned new restaurant growth for the foreseeable future. We may also open new BJs Restaurant & Brewery
®
formats or brewpub locations (brewing
restaurants) to maintain our beer supply throughout our organization as we open more restaurants or if
on-site
brewing is the only legally permissible way to offer our proprietary craft beer.
We seek to obtain high-quality, high-profile locations for our casual plus restaurants, which we believe have the ability to draw customers from a
larger area than most mass market casual dining chain restaurants. The size of our restaurant trade areas vary from location to location, depending on a number of factors such as population density, retail traffic generators and
geography. We believe the locations of our restaurants are critical to our long-term success. Accordingly, we devote significant time and resources to analyzing each prospective site. Since BJs has proven that it can be successful in a variety
of locations (urban or suburban shopping areas, retail strip centers, lifestyle centers, and entertainment centers either freestanding or
in-line)
and in a variety of income demographics, we
can be highly selective and flexible in choosing suitable locations. In general, we currently prefer to open our restaurants at high-profile sites in mature trade areas with dense populations. Additionally, we generally target geographic regions
that allow us to build multiple restaurants in those areas. This clustering approach provides economic benefits including lower supply and distribution costs, improved marketing efficiencies, management supervision leverage and increased
brand awareness. As with most growing retail and restaurant chain operations, there can be no assurance that the transfer of sales or cannibalization among our locations will not inadvertently occur or become more significant in the
future as we gradually increase our presence in existing markets to maximize our competitive position and financial performance in each market.
During
fiscal 2016, we opened 17 new restaurants and closed our Century City, California restaurant as a result of our landlord exercising their right to terminate our lease in return for a termination fee due to the mall being remodeled and reconfigured.
Overall we increased our total restaurant operating weeks by approximately 11% during the year, including the effect of the 53
rd
week. During fiscal 2017, we expect to open 10 new restaurants.
Based on information currently available, we expect to open seven restaurants during the first half of fiscal 2017 and the remaining restaurants in the second half of the year. However, there are a number of risks associated with opening new
restaurants and entering new markets, and it is difficult for us to precisely predict the timing of our new restaurant openings due to many factors that are outside of our control, including those identified under Risk Factors in Part I,
Item 1A of this Annual Report on Form
10-K.
We have signed leases, land purchase agreements or letters of intent
for all of our potential restaurant openings for fiscal 2017. We are currently negotiating additional leases and/or real estate purchases for potential future locations for fiscal 2018 and 2019. We typically enter into operating leases for our
locations for periods ranging from 10 to 20 years. We obtain lease extension options in most instances. Our restaurants can either be freestanding or
in-line.
Our lease payment terms vary from lease to lease,
but generally provide for the payment of both minimum base rent and
6
contingent (percentage) rent based on restaurant sales. We are generally responsible for our proportionate share of common area maintenance (CAM), insurance, property tax and other
occupancy-related expenses under our leases. We expend cash for leasehold improvements and furnishings, fixtures and equipment to build out our leased premises. We may also expend cash for permanent structural additions that we make to leased
premises.
We may have some of the costs to open a restaurant reimbursed to us by our landlords in the form of tenant improvement allowance incentives
pursuant to agreed-upon terms in our leases. These allowances usually take the form of
up-front
cash, full or partial credits against minimum or percentage rents otherwise payable by us, or a combination
thereof. Generally, a landlord will charge us additional rent for any allowances provided to us. We typically seek tenant improvement allowances of approximately $100 per square foot; however, not every location we develop into a restaurant will
have such allowances available. During fiscal 2016, we opened 17 new restaurants, of which only eight restaurants received tenant improvement allowances. For these restaurants, our average tenant improvement allowance was approximately $90 per
square foot. There can be no assurance that such allowances will be available for every potential location that we seek to open a new restaurant. We may also purchase the land underlying certain restaurant locations if it becomes available. However,
it is not our current strategy to own a large number of land parcels that underlie our restaurants. In many cases, we subsequently enter into sale-leaseback arrangements for land parcels that we purchase.
TARGETED NEW RESTAURANT ECONOMICS
Our current prototype
is approximately 7,400 square feet with seating for as many as 225 customers with a targeted gross construction cost of approximately $4.0 million (before tenant improvement allowances, if any). Our construction costs for new restaurants may
vary significantly depending on a number of factors including, but not limited to their sizes, layout (custom or prototype), type of construction labor (union or
non-union),
local permitting requirements, the
scope of any required site work, the cost of liquor and other licenses and
hook-up
fees, geographical location and facility type (for example, whether the site will have the capacity to brew beer).
In selecting sites for our restaurants, an important objective is to earn a suitable rate of return on our investment. However, this return often cannot be
meaningfully measured until our restaurants reach their mature levels of sales and profitability. Maturation periods vary from restaurant to restaurant, but generally range from two to five years. As a result of our new prototype, we currently
target a blended 25% to 30% return on our net cash invested to build a new restaurant, and a blended 20% to 25% return on total capital invested, which includes our net cash invested and a factor for the landlords invested capital (based on a
capitalized value of minimum rents to be paid to the landlord) for each group of new restaurants to be opened each year, measured once the restaurants reach their mature level of operations. Our targeted returns on invested capital in new
restaurants may change in the future, depending upon competitive conditions in the casual dining segment, real estate market conditions, construction and operating cost trends and other factors both within and outside of our control.
The aforementioned
return-on-investment
targets for our restaurant operations
do not include any allocation of opening costs, field supervision and corporate support expense,
non-cash
items such as depreciation, amortization, equity-related compensation expense, and income taxes, and do
not represent a targeted return on an investment in our common stock. Additionally, the actual performance of any new restaurant location will usually differ from its originally targeted performance due to a variety of factors, many of which are
outside of our control, and such differences may be material. There can be no assurance that any new restaurant opened will have similar operating results to those of established restaurants. See Risk Factors in Part I, Item 1A of this
Annual Report on Form
10-K
for a discussion of certain risks relating to the development and operation of our restaurants.
We generally target our new restaurants to achieve average annual sales at maturity of $4.5 million, and we generally target an average four
wall estimated operating cash flow margin in the range of 18% to 20% at maturity, after all occupancy expenses. Not all new restaurants are expected to achieve our average
return-on-investment
targets. Some may be targeted to achieve higher returns and some may be targeted to achieve lower returns, based on factors specific to each
restaurant location. These factors include, among other things, the level of overall consumer and market awareness for our brand in the locations general trade area; the specific occupancy structure and capital expenditure requirement for the
location; the availability and amount of tenant improvement allowances; and the expected operating cost structure in the trade area (i.e., minimum hourly wages, local costs for fresh commodities such as produce, etc.).
7
It is common in the casual dining industry for many new locations to initially open with sales volumes well in
excess of their sustainable
run-rate
levels. This initial honeymoon sales period usually results from the energy and excitement generated by restaurant openings in new or remodeled lifestyle
centers or retail projects that generate unusually high consumer traffic during grand openings. During the several months following the opening of new restaurants, consumer traffic and sales volumes gradually adjust downward to their expected, more
predictable and sustainable levels. In fact, it may take two to five years for a new restaurants sales to eventually settle at a more predictable and sustainable level. Every restaurant has its own individual opening sales pattern, and this
pattern is difficult to predict.
Additionally, all of our new restaurants usually require several months or longer after opening to reach their targeted
restaurant-level operating margin due to cost of sales and labor inefficiencies commonly associated with more complex casual dining restaurants. How quickly new restaurants achieve their targeted operating margin depends on many factors, including
the level of consumer familiarity with our brand when we enter new markets, as well as the availability of experienced managers and employees, and the time required to negotiate and obtain favorable costs for certain fresh food items and other
supplies from local suppliers. As a result, a significant number of restaurant openings in any single fiscal quarter, along with their associated opening expenses, could have a significant impact on our consolidated results of operations for that
period. Therefore, our results of operations for any single fiscal quarter are not necessarily indicative of the results expected for any other fiscal quarter nor for a full fiscal year.
RESTAURANT OPENING EXPENSES
Restaurant opening expenses
(also referred to as preopening expenses) include incremental
out-of-pocket
costs that are directly related to the openings of new restaurants that may not
be capitalized. As a result of the more complex operational nature of our casual plus restaurant concept compared to that of a typical casual dining chain restaurant, the preopening process for our new restaurants is more extensive, time
consuming and costly. The preopening expense for one of our restaurants usually includes costs to compensate an average of six to eight restaurant management employees prior to opening; costs to recruit and train an average of 150 hourly restaurant
employees; wages, travel and lodging costs for our opening training team and other support employees; costs to practice service activities; and straight-line minimum base rent during the construction and
in-restaurant
training period. Preopening expenses vary from location to location depending on a number of factors, including the proximity of our existing restaurants; the amount of rent expensed during the
construction and
in-restaurant
training periods; the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the relative difficulty of the
restaurant staffing process; the cost of travel and lodging for different metropolitan areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining necessary licenses and permits to open the restaurant. The
acquisition of our necessary operating licenses and permits may also depend on our landlords obtaining their licenses and permits, as well as fully completing their construction activities for the retail projects in which our leased premises are
located.
Our preopening expense for a prototypical BJs Restaurant & Brewhouse
®
location averaged approximately $0.4 million in fiscal 2016. Preopening expenses are typically higher for
non-prototypical,
custom footprint restaurants and for a restaurants initial
entry into a new market. During fiscal 2017, we plan to open our first restaurant in the states of South Carolina and Michigan, where we expect to incur initially higher preopening costs. We usually incur the most significant portion of direct
preopening costs within the
two-month
period immediately preceding and during the month of a restaurants opening. Preopening costs can fluctuate significantly from period to period, based on the number
and timing of restaurant openings and the specific preopening costs incurred for each restaurant. We expense preopening costs as incurred in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP).
BREWING OPERATIONS
Sales of our proprietary craft beers
represented approximately 8% of our total restaurant sales during fiscal 2016. In substantially all of our restaurants we also offer a wide selection of other popular craft beers on tap. Accordingly, total sales of beer represented approximately 11%
of our total restaurant sales during fiscal 2016.
Our internal brewing operations originated in 1996 with the opening of the first large format BJs
Restaurant & Brewery
®
location in Brea, California, which included our first
on-site
brewing operation. The Brea BJs
Restaurant & Brewery
®
serviced not only that restaurant, but also several other California restaurants, using a hub and spoke
8
production and distribution model that is legally permitted in California with certain limitations and restrictions. To supplement our internal brewing operations and as a result of the
constraints imposed by various state tied-house laws, which regulate how alcoholic beverages are manufactured, distributed and marketed, we also utilize qualified independent third party brewers to produce our beer, using our proprietary
recipes. In fiscal 2016, our four BJs Restaurant & Brewery
®
locations and two brewpub locations produced approximately 25,000 barrels of BJs branded beer, and independent
third party brewers produced approximately 36,000 barrels of BJs branded beer. Our brewing operations are typically staffed with a head brewer and an assistant brewer, who report to a brewing director. Production planning and quality control
are monitored by our corporate brewing operations department which is led by our Senior Vice President of Brewing Operations. Additionally, our
on-site
and independent third party brewing operations
periodically send out samples of each batch of BJs branded beer to an independent laboratory for quality control testing purposes.
As we continue
to expand the BJs restaurant concept, our requirement to produce our proprietary craft beer will continue to grow. As a result of that growth, we will continue to evaluate the benefits and risks associated with brewing our beer internally and
using qualified independent third party brewers, including factors such as availability of adequate production capacity, quality control procedures, federal and state laws, consistency of corporate and brand strategy, and the operating and capital
costs associated with independent third party brewing versus the costs of brewing operations ownership. We currently believe that a combination of internal brewing and larger-scale independent third party brewing represents the optimal production
method for our craft beers as we continue the expansion of our restaurants nationally. This approach allows us to get the benefits provided by brewing beer in larger batches, yet also provides us the flexibility to allow our brewing operations to
focus on specialty, seasonal and research and development beers. We estimate our total proprietary craft beer requirement to be approximately 71,000 barrels for fiscal 2017, with approximately 56% of that requirement expected to be produced by
independent third party brewers.
We also produce our proprietary
non-alcoholic
craft sodas that are sold in our
restaurants. Our craft sodas include root beer, cream, orange and black cherry soda.
MARKETING AND ADVERTISING
We believe that the most effective method, over the long run, to protect and enhance our customer visit frequency is to spend our marketing dollars on the
plate and provide better food quality, service and facilities for our customers. However, due to sluggish retail sales growth coupled with the maturation of the casual dining segment of the restaurant industry, we have been prudently increasing our
marketing expenditures to improve our awareness and brand equity in the markets that we operate. Our marketing spend generally takes the form of limited television for those markets in which we have enough restaurant penetration, as well as print,
radio, digital and social media programs. We also utilize our loyalty program, BJs Premier Rewards
®
, to engage with our customers and monitor their frequency and purchasing behavior.
Our marketing related expenditures were approximately 1.9%, 2.2%, and 2.3% of revenues for fiscal 2016, 2015, and 2014, respectively. We expect our
marketing expenditures in 2017 to continue to be between 2% to 3% of our revenues. However, depending on the current operating conditions for casual dining restaurants, we may decide to increase or decrease our marketing expenditures beyond our
current expectations.
CHARITABLE ACTIVITIES
At
BJs we believe it is important to give back to the communities we serve and to do more good things for more people. In fiscal 2006, we started the BJs Restaurants Foundation (the Foundation), a 501(c)(3) qualified
non-profit
charitable organization, principally dedicated to supporting charities that benefit childrens healthcare and education, with a primary focus on the Cystic Fibrosis Foundation (CFF). Our
Chairman of the Board of Directors and four of our current executive officers currently serve on the Foundations seven-person Board of Directors. Our commitment to supporting humanitarian causes is exemplified by our Cookies for
Kids program, which supports CFF by donating a portion of our Pizookie
®
sales to CFF. In addition, we arrange for the collection and donation of other funds to CFF through our restaurant
preopening training programs. These programs, combined with other programs administered by the Foundation resulted in the donation of $0.4 million to CFF during fiscal each of the last three fiscal years.
We also focus on supporting our local communities by providing food and other resources for many worthwhile charitable causes and events. The
Foundations Team Action to Support Communities (TASC Force) program
9
recognizes and rewards the volunteer efforts of our restaurant employees across the country as they help to give back to the communities in which our restaurants do business. The TASC Force
program received the prestigious Restaurant Neighbor Award in the large business category for 2009 from the National Restaurant Association. The TASC Force teams have helped fulfill the wishes of special needs kids, placed flags in a national
cemetery by the graves of fallen soldiers, painted over unsightly graffiti and helped clean up beaches, parks and school grounds. In addition, the TASC Force teams have hosted blood drives, worked with Special Olympics, painted houses for elderly
citizens, supported Habitat for Humanity,
re-built
playgrounds, worked at food banks, participated in fundraising runs and walkathons and delivered food to families in need.
INFORMATION SYSTEMS
We believe it is extremely
important to provide our operators with state of the art, secure technology so that they can better serve our customers and our employees in a more productive and efficient manner. These technologies include an automated kitchen display system
(KDS) and bar display system (BDS), a
web-based
labor scheduling and productivity analyzer system, a theoretical food cost system and an automated front desk table management system.
Each of these systems is integrated into our Point of Sale (POS) system which is used to record sales transactions, send menu orders to our kitchen, batch and transmit credit card transactions, record employee time clock information and
produce a variety of management reports. Our KDS is an automated routing and cooking station balancing system which improves cooking station productivity, synchronizes order completion, provides valuable ticket time and cooking time data, and allows
for more efficient levels of labor without sacrificing quality. Our BDS is an automated routing and beverage station balancing system which improves beverage station productivity by further leveraging our automation capability. Additionally, our
web-based
labor scheduling and productivity analyzer automates the labor scheduling for the managers and employees and produces a number of real-time key performance indicators and productivity reports for our
management team, including controls and alerts to assist in complying with federal, state and local labor laws. Our theoretical food cost system and automated food prep system allow us to better measure product yields in our kitchens and help reduce
kitchen errors and eliminate excessive waste. Our automated front desk table management system helps us to better optimize the overall seating efficiencies and table turns in our restaurants. We also utilize a centralized accounting and
human resources system that collects data from our restaurants in order to produce operational and scorecard reporting as well as a data center technology services with cloud based technologies to provide scalability and bursting capabilities which
support growth and enable rapid technology deployments. Our electronic human resources workflow solution streamlines and expedites the process of onboarding new team members, while insuring accuracy and facilitating the collection of richer data.
Our tablet-based inventory technology streamlines our inventory counting process while insuring accuracy. Our BJs mobile application, which allows our customers to use their smartphones to order ahead, add their name to our waitlist, pay at
the table and manage their loyalty account, among other things, has been well received by our customers. We will continue to develop restaurant and support technologies that help improve the customer experience, employee effectiveness, financial
management and cost control. As part of this continued development we have been testing hand held point of sales systems and pay at the table devices. All new technology is thoroughly tested before any company-wide rollout is implemented.
SUPPLY CHAIN MANAGEMENT
Our supply chain department,
working together with our culinary research and development team, is responsible for the selection and procurement of all of the food ingredients, beverages, products and supplies for our restaurants and brewing operations. Additionally, the supply
chain department manages procurement agreements in the areas of energy, transportation and general corporate services. We seek to obtain the highest quality menu ingredients, products and supplies from reliable, approved sources at competitive
prices. Ingredient specifications are mandated by the supply chain department in order to consistently maintain the highest quality ingredients and operational materials. We continually research and evaluate various food ingredients, products and
supplies for consistency and quality and compare them to our detailed specifications. In order to maximize operating efficiencies between purchase and usage, each restaurants Executive Kitchen Manager determines daily usage requirements for
food ingredients, products and supplies for their restaurant and places all orders with vendors approved by our supply chain department. Our Executive Kitchen Managers also inspect our deliveries to ensure that the items received meet our quality
specifications and negotiated prices. For many of our menu ingredients, we have arranged for acceptable alternative manufacturers, vendors, growers and shippers in order to reduce risk in our supply chain.
10
Where economically feasible and possible, we attempt to negotiate contracts for key commodities used in the
preparation of our food and beverage offerings, based on our expected requirements for each fiscal year. If our attempts are successful, most of our contracts typically range in duration from three to twelve months, and are generally set to expire
at the end of calendar quarters (if less than a year in duration) or at the end of our fiscal year (if annual in duration). We attempt to contract for the majority of our more significant commodities (chicken, beef and wheat-based products) for
various periods of time with the objective of stabilizing our costs and ensuring product availability. However, there is no assurance that we will be able to continue to do so in light of the continuing volatility in the supplies and costs for many
food commodities. Although we currently do not directly engage in future contracts or other financial risk management strategies with respect to potential commodity cost fluctuations, from time to time we may opportunistically request that our
suppliers consider doing so to help minimize the impact of potential cost fluctuations. Suppliers will typically pass the cost of such strategies along to us, either directly or indirectly.
We use Distribution Market Advantage (DMA), a consortium of large, regional food distributors located throughout the United States to deliver the
majority of our food products to our restaurants. Our agreement with DMA is for five years expiring June 2017. We are currently in the final stages of renewing our existing agreement with DMA to extend our program an additional five years so as to
expire in June 2022. Jacmar Foodservice Distribution is a member of DMA and is the primary distributor of food and operating supplies for our California and Nevada restaurants. See Note 11 of Notes to Consolidated Financial Statements in Part IV,
Item 15 of this Annual Report on Form
10-K
for related party transactions. We have a
non-exclusive
contract with DMA on terms and conditions that we believe are
consistent with those made available to similarly situated restaurant companies.
Additionally, in 2006 we entered into an agreement with the largest
nationwide foodservice distributor of fresh produce in the United States to service most of our restaurants and, where licensed, to distribute our proprietary craft beer to our restaurants. This distributor currently delivers our proprietary craft
beer to approximately 50% of our restaurants. If our relationship with this distributor were discontinued, we would pursue alternative distributors. However, it may take some time to enter into replacement distribution arrangements, and our costs
for distribution may increase as a result.
The overall cost environment for food commodities can be extremely volatile due to domestic and worldwide
agricultural, supply/demand and other macroeconomic factors that are outside of our control. Additionally, the availability and prices of food commodities can also be influenced by increased energy prices, animal-related diseases, natural disasters,
increased
geo-political
tensions, the relationship of the dollar to other currencies, consumer demand both domestically and worldwide, and other factors. Virtually all commodities purchased and used in the
restaurant industry, including proteins, grains, oils, dairy products, and energy have varying amounts of inherent price volatility associated with them. Additionally, during periods of rising costs for diesel fuel, our major distributors have the
ability under our agreements to pass along fuel surcharges to us that are triggered when their cost per gallon of diesel fuel exceeds a certain level. While we attempt to manage these factors by offering a diversified menu and by attempting to
contract for our key commodities for extended periods of time whenever feasible and possible, there can be no assurance that we will be successful in this respect due to the many factors that are outside of our control.
COMPETITION
The domestic restaurant industry is highly
competitive and generally considered to be mature. There are a substantial number of casual dining chain restaurants, as well as fast casual and quick service restaurant chains and other food and beverage service operations, that compete both
directly and indirectly with us in every respect, including food quality and service, the
price-value
relationship, beer quality and selection, atmosphere, suitable sites for new restaurants and for qualified
personnel to operate our restaurants, among other factors. We also compete within each of our trade areas with national and regional restaurant chains and locally-owned restaurants. We also face growing competition as a result of the trend toward
convergence in grocery, deli and restaurant services, particularly in the supermarket industry which offers convenient meals in the form of improved entrées and side dishes.
Our restaurant concept is a relatively small varied menu casual dining competitor when compared to the mature mass market chains, with
63 of our restaurants currently located in one state California. Our overall brand awareness and competitive presence in states outside of California is not as significant as that of our major casual dining chain competitors. Many
competitors with similar concepts to ours have been in business longer than we have, have greater consumer awareness, and often have substantially greater capital, marketing and human resources.
11
Accordingly, we must be prepared to constantly evolve and refine the critical elements of our restaurant concept over time to protect our longer-term competitiveness. Additionally, due to the
continuing difficult operating environment for casual dining restaurants, coupled with continuing pressure on consumer spending for restaurant occasions, we expect that our larger chain restaurant competitors will continue to allocate even more
resources to their national media advertising and discounting programs in order to protect their respective market shares, which could have an adverse effect on our sales and results of operations.
The restaurant industry can be significantly affected by changes in consumer tastes and nutritional concerns, national, regional or local economic conditions,
demographic trends, traffic patterns, weather, and the type and number of competing restaurants. Changes in these factors could adversely affect us. In addition, other factors such as increased food, beverage, labor, energy and other operating costs
could adversely affect us. We believe, however, that our ability to offer higher quality food and beverages at moderate prices with superior service in a distinctive dining environment provides us with the opportunity to capture additional market
share in the casual dining segment.
FOOD QUALITY AND SAFETY
Our revenues can be substantially affected by adverse publicity resulting from food quality, illness, or health concerns stemming from incidents occurring at
a single restaurant of ours as well as incidents that may occur at our competitors restaurants. In addition, our revenues can be affected by illness or health concerns stemming from incidents occurring at our suppliers or competing suppliers.
While we believe that our internal policies and procedures for food safety and sanitation are thorough, the risk of food-borne illness cannot be completely eliminated, and incidents at other restaurant chains or in the food supply chain may affect
our restaurants even if our restaurants are not implicated in a food safety concern. We attempt to manage risks of this nature through food safety controls throughout our supply chain and internal training programs, but the occurrence of any one of
these factors in any one of our restaurants or elsewhere within the foodservice industry could cause our entire Company to be adversely affected.
RELATED PARTY TRANSACTIONS
The Jacmar Companies and
their affiliates (collectively referred to herein as Jacmar) is one of our shareholders and James Dal Pozzo, the Chief Executive Officer of Jacmar, is a member of our Board of Directors. Jacmar, through its affiliation with DMA, is
currently our largest supplier of food, beverage, paper products and supplies. We began using DMA for our national foodservice distribution in July 2006. In July 2012, we finalized a new five-year agreement with DMA, after conducting another
extensive competitive bidding process. Jacmar services our restaurants in California and Nevada, while other DMA distributors service our restaurants in all other states. Under the terms of our agreement with DMA, Jacmar is required to sell products
to us at the same prices as the other DMA distributors. Jacmar does not provide us with any produce, liquor, wine or beer products, all of which are provided by other third party vendors and are included in Cost of sales on the
Consolidated Statements of Income. See Note 11 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form
10-K
for more information on related party transactions.
GOVERNMENT REGULATIONS
We are subject to various
federal, state and local laws, rules and regulations that affect our business. Each of our restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, labor/equal
employment, building, land use, health, safety and fire agencies, and environmental regulations in the state or municipality in which the restaurant is located. Difficulties obtaining or maintaining the required licenses or approvals could delay or
prevent the development of a new restaurant in a particular area or could adversely affect the operation of an existing restaurant. We believe, however, that we are in compliance in all material respects with all relevant laws, rules, and
regulations. We have never experienced abnormal difficulties or delays in obtaining the licenses or approvals required to open a new restaurant or in continuing the operation of an existing restaurant.
Alcoholic beverage control regulations require each of our restaurants to apply to a federal and state authority and, in certain locations, municipal
authorities for a license and permit to sell alcoholic beverages on and off premises. Typically, licenses must be renewed annually and may be revoked or suspended for cause by such authority at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of our restaurants,
12
including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages.
Our restaurants and brewing operations are subject to tied house laws and the three tier system of beverage alcohol distribution,
which were introduced after the repeal of Prohibition by various states. These laws generally prohibit brewers from holding an interest in retail licenses and require manufacturers, distributors and retailers to remain separate tiers.
Over the last 25 years, brewpubs, which are both retailers and brew beer onsite, have been authorized by law in most states through specific exceptions to these laws. These exceptions are unique to each state and do not mirror one
another. However, brewpubs are generally licensed as retailers and do not have the same privileges as microbreweries, and the privileges of, and restrictions imposed on, brewpubs vary from state to state. These restrictions sometimes prevent us from
operating both brewpubs and restaurants in some states. We believe that we are currently in compliance with the brewpub regulations in the states where we hold such licenses. However, there is some risk that a states brewpub regulations or the
interpretation of these regulations may change in a way that could impact our current model of brewing beer and/or supplying beer to our restaurants in that state. We apply for our alcoholic beverage licenses with the advice of outside legal and
licensing counsel and consultants. Even after the issuance of these licenses, our operations could be subject to differing interpretations of the tied house laws and the requirements of the three tier system of beverage
alcohol distribution in any jurisdiction that we conduct business. Additionally, the failure to receive or retain, or a delay in obtaining, a liquor license in a particular location could adversely affect our ability to obtain such a license
elsewhere.
We are subject to dram-shop statutes in California and other states in which we operate. Those statutes generally provide a person
who has been injured by an intoxicated person the right to recover damages from an establishment that has wrongfully served alcoholic beverages to such person. We carry liquor liability coverage as part of our existing comprehensive general
liability insurance, which we believe is consistent with coverage carried by other entities in the restaurant industry and would help protect us from exposure created by possible claims. Even though we carry liquor liability insurance, a judgment
against us under a dram-shop statute in excess of our liability coverage could have a materially adverse effect on us. Regardless of whether any claims against us are valid or whether we are liable, claims may also be expensive to defend and may
divert managements time and our financial resources away from our operations. We may also be adversely affected by publicity resulting from such claims.
Various federal and state labor laws, along with rules and regulations, govern our relationship with our employees, including such matters as minimum wage,
overtime, tip credits, health insurance, working conditions, safety and work eligibility requirements. Significant additional governmental mandates, such as an increased minimum wage, a change in the laws governing exempt employees, an increase in
paid time off or leaves of absence, mandates on health benefits and insurance or increased tax reporting and payment requirements for employees who receive gratuities, could negatively impact our restaurants profitability. We are also subject
to the regulations of the Immigration and Customs Enforcement (ICE) branch of the United States Department of Homeland Security. In addition, some states in which we operate have adopted immigration employment protection laws. Even if we
operate our restaurants in strict compliance with ICE and state requirements, some of our employees may not meet federal work eligibility or residency requirements, despite our efforts and without our knowledge, which could lead to a disruption in
our work force. Additionally, our suppliers may also be affected by various federal and state labor laws which could result in supply disruptions for our various goods and services or higher costs for goods and services supplied to us.
We are also subject to various laws and proposals regarding regulations relating to nutritional content, nutritional labeling, product safety and menu
labeling.
We are subject to federal and state environmental regulations. Various laws concerning the handling, storage, and disposal of hazardous
materials, such as cleaning solvents, and the operation of restaurants and brewpubs in environmentally sensitive locations may impact aspects of our operations. During fiscal 2016, there were no material capital expenditures for environmental
control facilities.
Our facilities must comply with the applicable requirements of the Americans With Disabilities Act of 1990 (ADA) and
related state statutes. The ADA prohibits discrimination on the basis of disability with respect to public accommodations and employment. Under the ADA and related state laws, when constructing new restaurants or undertaking significant remodeling
of existing restaurants, we must make them readily accessible to disabled persons. We must also make reasonable accommodations for the employment of disabled persons.
13
We have a significant number of hourly restaurant employees who receive income from gratuities. We have elected
to voluntarily participate in a Tip Reporting Alternative Commitment (TRAC) agreement with the Internal Revenue Service. By complying with the educational and other requirements of the TRAC agreement, we reduce the likelihood of
potential employer-only FICA assessments for unreported or under reported tips.
EMPLOYEES
At February 27, 2017, we employed approximately 22,000 employees at our 189 restaurants. Most of our employees in our restaurant operations provide their
services on a part-time basis. We also employed approximately 220 employees at our restaurant support center and in our field supervision organization. We believe that we maintain favorable relations with our employees. Currently, no unions or
collective bargaining arrangements are in place at our Company.
INSURANCE
We maintain property and casualty insurance with coverage and limits we believe are currently appropriate for our operations. We retain a substantial portion
of our workers compensation and general liability costs through self-insured retentions and large deductibles. There is no assurance that any insurance coverage maintained by us will be adequate or that we will not experience claims in excess
of our coverage limits; that we can continue to obtain and maintain such insurance at all; or that our premium costs will not rise to an extent that they will adversely affect our ability to economically obtain or maintain such insurance. While we
also carry employment practices insurance, a settlement or judgment against us in excess of, or outside of, our coverage limitations could have a material adverse effect on our results of operations, liquidity, financial position and business. See
Limitations in our insurance coverage or rising insurance costs could adversely affect our business or financial condition in certain circumstances in Risk Factors contained in Part I, Item 1A of this Annual Report on Form
10-K.
TRADEMARKS AND COPYRIGHTS
We believe that our trademarks, service marks and other proprietary rights have significant value and are important to our brand-building effort and the
marketing of our restaurant concept. Our domestically-registered trademarks and service marks include, among others, our stylized logos displaying the name BJs for restaurant services, restaurant and bar services,
on-line
ordering and
take-out
restaurant services and the word mark BJs for restaurant and bar services,
take-out
and
carry-out
restaurant services. We have also registered with the United States Patent and Trademark Office many of our standard and seasonal beer logos and names, as well as many of our signature menu item
names including Great White and Sweet Pig for our proprietary pizzas, Pizookie for our proprietary dessert and Enlightened Entrees, Craft Matters and Wow, I Love This Place for
our branding. We have registered our BJs logo mark in a number of foreign countries. Additional domestic and foreign trademark applications are pending. We have also registered our ownership of the internet domain name
www.bjsrestaurants.com
and other internet domain names. We have in the past protected, and expect to continue to vigorously protect, our proprietary rights. We cannot predict whether steps taken by us to protect our proprietary
rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon, or otherwise similar to, our concept and products. There may be other restaurants, retailers and/or businesses that also use
the letters BJs in some form or fashion throughout the United States and abroad. It may be difficult for us to prevent others from copying elements of our concept. Any litigation undertaken to enforce our rights will likely be
costly. In addition, we may face claims of misappropriation or infringement of third parties trademarks, patents or other intellectual property rights. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing
to use certain intellectual property rights or information in the future and may result in a judgment or monetary damages.
14
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our executive officers and senior management as of February 27, 2017:
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Gregory A. Trojan
|
|
57
|
|
President, Chief Executive Officer and Director
|
Gregory S. Levin
|
|
49
|
|
Executive Vice President, Chief Financial Officer and Secretary
|
Gregory S. Lynds
|
|
55
|
|
Executive Vice President and Chief Development Officer
|
Lon F. Ledwith
|
|
59
|
|
Executive Vice President of Operations
|
Kevin E. Mayer
|
|
47
|
|
Executive Vice President and Chief Marketing Officer
|
Jeffrey H. Fowler
|
|
51
|
|
Senior Vice President and Chief Supply Chain Officer
|
Brian S. Krakower
|
|
46
|
|
Senior Vice President and Chief Information Officer
|
Kendra D. Miller
|
|
42
|
|
Senior Vice President, General Counsel and Assistant Secretary
|
Alexander M. Puchner
|
|
55
|
|
Senior Vice President, Brewing Operations
|
GREGORY A. TROJAN has served as our President and a member of the Companys Board of Directors since December 2012 and as
our Chief Executive Officer since February 2013. Prior to joining the Company, Mr. Trojan was employed by Guitar Center, Inc., a leading retailer of musical instrument products, where he served as President, Chief Executive Officer and Director
from November 2010 to November 2012 and as President, Chief Operating Officer and Director from October 2007 to November 2010. From 1998 to 2006, Mr. Trojan served as Chief Executive Officer of House of Blues Entertainment, Inc., an operator of
restaurant and music venues, concerts and media properties, having served as President from 1996 to 1998. Prior to that, he held various positions with PepsiCo from 1990 to 1996, including service as an executive officer and eventually as Chief
Executive Officer of California Pizza Kitchen, Inc., when it was owned by PepsiCo. Earlier in his career, Mr. Trojan was a consultant at Bain & Company, the Wharton Small Business Development Center and Arthur Andersen &
Company. Mr. Trojan served on the Board of Directors at Oakley Inc. from June 2005 to November 2007. Since March 2010, he has served as a director of Dominos Pizza, Inc.
GREGORY S. LEVIN has served as our Chief Financial Officer since September 2005. He was promoted to Executive Vice President in October 2007 and added the
post of Secretary in June 2008. From February 2004 to August 2005, Mr. Levin served as Chief Financial Officer and Secretary of SB Restaurant Company, a privately held company that operated the Elephant Bar Restaurants. From 1996 to 2004,
Mr. Levin was employed by California Pizza Kitchen, Inc., operator and licensor of casual dining restaurants, with his last position as Vice President, Chief Financial Officer and Secretary. Earlier in his career, he served as an audit manager
with Ernst & Young LLP.
GREGORY S. LYNDS has served as our Chief Development Officer since July 2003 and was promoted to Executive Vice
President in October 2007. Prior to joining the Company, Mr. Lynds served as a Director of Real Estate for Darden Restaurants, Inc., the largest casual dining company in America. Prior to joining Darden, Mr. Lynds served as Vice President
of Real Estate and Development for Wilshire Restaurant Group (Marie Callenders and East Side Marios) and was a partner responsible for expanding the Mimis Café brand.
LON F. LEDWITH has served as our Executive Vice President of Operations since April 2015. Prior to this responsibility, he served as our Senior Vice President
of Operations Talent Development from January 2010 to March 2015, as our Senior Vice President of Restaurant Operations from April 2006 to December 2009, and as Vice President of Operations from February 2004 to March 2006. From July 1981 to
November 2003, Mr. Ledwith was employed by Brinker International, Inc., with his last position as a Regional Vice President of the Chilis Grill & Bar concept.
KEVIN E. MAYER has served as our Executive Vice President and Chief Marketing Officer since July 2014. Prior to joining the Company, Mr. Mayer was
employed by Volkswagen of America, the U.S. subsidiary of the second largest global auto brand, Volkswagen AG, where he served as Vice President of Marketing from June 2012 to December 2013. From October 2010 to June 2012, Mr. Mayer was
employed by General Motors and served as their Director of Global Advertising and Promotions for Chevrolet. Prior to that, Mr. Mayer served as the Director of Marketing Communications for Subaru of America from March 2007 to October 2010. Early
in his career, Mr. Mayer served in a variety of agency and client-side leadership roles such as Grey Advertising.
15
JEFFREY H. FOWLER has served as our Senior Vice President and Chief Supply Chain Officer since November 2016.
Prior to joining the Company, Mr. Fowler served as Vice President of Operations and Supply Chain Management for Lands O Lakes from 2011 to 2015. Prior to that, Mr. Fowler was employed by Foster Dairy Farms/Crystal Creamery where he
served as Vice President of Operations and Transportation from 2008 to 2011. From 2005 to 2008, Mr. Fowler was employed by Campbells Soup and served as their Director of Operations and Director of Supply Chain Strategy. Earlier in his
career he served in various management roles for HP Hood LLC and Safeway Stores in their Supply divisions.
BRIAN S. KRAKOWER has served as our Senior
Vice President and Chief Information Officer since February 2013. Prior to joining the Company, Mr. Krakower served as Chief Technology Officer for Restaurant Revolution Technologies, a restaurant order management technology solutions company.
From 2007 to 2012, Mr. Krakower was employed by California Pizza Kitchen, Inc., operator and licensor of casual dining restaurants, with his last position as Vice President of Information Technology. From 2003 to 2007, Mr. Krakower served
as Senior Director of Information Technology Corporate Systems for The Cheesecake Factory Incorporated, a publicly held operator of upscale casual dining restaurants. Prior to that, Mr. Krakower was employed by House of Blues
Entertainment, Inc., an operator of restaurant and music venues, concerts and media properties, where he served as its Senior Director of Information Systems & Technology from 1997 to 2003.
KENDRA D. MILLER has served as our Senior Vice President, General Counsel and Assistant Secretary since March 2011. From August 2008 to February 2011,
Ms. Miller practiced law as a partner at the international law firm of Crowell & Moring LLP in Irvine, California. From January 2001 to August 2008, she was employed by Carlton, DiSante & Freudenberger LLP, where she became a
partner in January 2008. From September 1999 to December 2000, she practiced law at Paul, Hastings, Janofsky & Walker LLP in Los Angeles, California. In her private practice, she litigated on behalf of and counseled numerous restaurant
chains on employment law and business matters.
ALEXANDER M. PUCHNER has served as our Senior Vice President of Brewing Operations since 1996. From 1993
to 1995, Mr. Puchner was a founder and brewmaster for a number of southern California-based breweries, including Laguna Beach Brewing Co., Huntington Beach Beer Co., Newport Beach Brewing Co. and Westwood Brewing Co. From 1988 to 1993,
Mr. Puchner served as a product manager for Aviva Sports/Mattel Inc. and as a marketing research manager for Mattel Inc. Mr. Puchner has been a nationally certified beer judge since 1990.
ITEM 1A. RISK FACTORS
The risk factors presented below may affect our future operating results, financial position and cash flows. The risks described in this Item 1A and other
sections of this Annual Report on Form
10-K
are not exhaustive and are not the only risks we may ever face in our business. We operate in a very competitive and rapidly changing environment. New risks and
uncertainties arise from time to time, and we cannot predict those events or how they may affect us. There may be other risks and uncertainties that are not currently known or that are currently deemed by us to be immaterial. However, they may
ultimately adversely affect our business, financial condition and/or operating results. In addition to the risk factors presented below, changes in general economic conditions, credit markets, consumer tastes, discretionary spending patterns,
demographic trends, and consumer confidence in the economy, all of which affect consumer behavior and spending for restaurant dining occasions, may have a material impact on us.
Failure to maintain a favorable image, credibility and the value of the BJs brand and our reputation for offering customers a higher quality more
differentiated total dining experience at a good value could adversely affect our business.
The successful operation of the BJs restaurant
concept and the execution of our national expansion plan are highly dependent upon BJs ability to remain relevant to consumers and a brand they trust. We believe that we have built a strong reputation for quality and our differentiated
BJs menu and beverage offerings are integral components of the total dining experience that customers enjoy in our restaurants. We believe that we must continue to protect, enhance and evolve the BJs brand to continue to be successful in
the future. Any incident that erodes consumer trust in or affinity for the BJs brand could significantly reduce its value. If consumers perceive or experience any reduction in our food or beverage quality, service or facility ambiance, or in
any way believe we failed to deliver a consistently positive dining experience, the value of the BJs brand and our entire Company could be impaired. We may also need to evolve
16
the BJs restaurant concept in order to compete with popular new restaurant formats or concepts that emerge from time to time, and we cannot provide any assurance that we will be successful
in doing so, or that any changes we make to our concept in response will be successful or not adversely affect our profitability. In addition, with the increasing prevalence of food-away-from-home at fast casual restaurants, single-serve operations,
quick-service restaurants and certain grocery operations, combined with the continuing pressure on consumer discretionary spending for restaurant occasions, consumers may choose less expensive alternatives to BJs which could also negatively
affect customer traffic at our restaurants.
In addition, our ability to successfully develop new restaurants in new markets may be adversely affected by
a lack of awareness or acceptance of our brand in these new markets. To the extent that we are unable to foster name recognition and affinity for our brand in new markets, our new restaurants may not perform as expected and our growth may be
significantly delayed or impaired.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media
may materially adversely impact our business.
There has been a significant increase in the use of social media and similar platforms, including
weblogs (blogs), social media websites and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Consumers value readily available information concerning
goods and services that they have or plan to purchase, and may act on such information without further investigation or authentication. The availability of information on social media platforms is virtually immediate as is its impact. Many social
media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is
seemingly limitless and readily available. Information concerning our Company may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or
business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms also could be used for dissemination of trade secret information, compromising valuable company assets. In summary, the dissemination
of information online could harm our business, prospects, financial condition and results of operations, regardless of the informations accuracy. The inappropriate use of social media vehicles by our customers or employees could increase our
costs, lead to litigation or result in negative publicity that could damage our reputation.
As part of our marketing efforts, we rely on search engine
marketing and social media platforms such as Facebook
®
, Twitter
®
and Google+ to attract and retain customers. We also are
initiating a multi-year effort to implement new technology platforms that should allow us to improve our level of digital engagement with our customers and employees and thereby help strengthen our marketing and related consumer analytics
capabilities. These initiatives may not prove to be successful and may result in expenses incurred without the benefit of higher revenues or increased engagement. Our brand could also be confused with brands that have similar names, including but
not limited to brands such as BJs Wholesale Club and other unaffiliated restaurants that use BJs in their names. As a result, our brand value may be adversely affected by any negative publicity related to others that use
BJs in their brand names. We have registered certain trademarks and service marks in the United States and foreign jurisdictions. However, we are aware of names and marks identical or similar to our service marks being used from
time to time by other persons. Although our policy is to oppose any such infringement, further or unknown unauthorized uses or other misappropriation of our trademarks or service marks could diminish the value of our brands and adversely affect our
business.
Any deterioration in general economic conditions may affect consumer spending and may adversely affect our revenues, operating results
and liquidity.
Any decrease in customer traffic or the average expenditure per customer will negatively impact our financial results, since
reduced sales result in the deleveraging of the fixed and semi-fixed costs in our operations and thereby cause downward pressure on our operating profits and margins. There is also a risk that if negative economic conditions persist for a long
period of time or worsen, consumers may make long-lasting changes to their discretionary purchasing behavior, including less frequent discretionary purchases on a more permanent basis.
17
The above factors could also impose practical limits on our menu price increases. From time to time, we may
announce that we intend to take price increases on selected menu items in order to offset increased operating expenses. However, we cannot provide assurance that menu price increases will not deter customers from visiting our restaurants, reduce the
frequency of their visits or affect their purchasing decisions.
Any deterioration in general economic conditions could have a material adverse
impact on our landlords or on businesses neighboring our locations, which may adversely affect our revenues and results of operations.
Any
deterioration in general economic conditions could result in our landlords being unable to obtain financing or remain in good standing under their existing financing arrangements which could result in their failure to satisfy obligations to us under
leases, including failures to fund or reimburse agreed-upon tenant improvement allowances. Any such failure could adversely impact our operations.
In
addition, if our landlords are unable to obtain sufficient credit to continue to properly manage their retail centers, we may experience a drop in the level of quality of such centers where we operate restaurants. Our future development of new
restaurants may also be adversely affected by the negative financial situation of developers and potential landlords. Landlords may try to delay or cancel recent development projects (as well as renovations of existing projects) which could reduce
the number of appropriate locations available that we would consider for our new restaurants. Furthermore, the failure of landlords to obtain licenses or permits for development projects on a timely basis, which is beyond our control, may negatively
impact our ability to implement our development plan.
Our restaurants are generally located in retail developments with nationally recognized
co-tenants,
which help increase overall customer traffic into those retail developments. Some of our
co-tenants
have ceased or may cease operations in the future or have
deferred openings or fail to open in a retail development after committing to do so. These failures may lead to reduced customer traffic and a general deterioration in the surrounding retail centers in which our restaurants are located and may
contribute to lower customer traffic at our restaurants. If these retail developments experience high vacancy rates, we could experience decreases in customer traffic. A decrease in customer traffic may adversely affect our results of operations.
Changes in consumer buying patterns, particularly
e-commerce
sites, may affect our revenues, operating
results and liquidity.
Our restaurants are primarily located near high consumer activity areas such as regional malls, lifestyle centers,
big box shopping centers and entertainment centers. We depend in large part on a high volume of visitors to these centers to attract customers to our restaurants.
E-Commerce
or online shopping
continues to increase and negatively impact consumer traffic at traditional brick and mortar retail sites located in regional malls, lifestyle centers, big box shopping centers and entertainment centers. A decline in
development or in visitors to these centers near our restaurants may negatively affect our sales.
If we do not successfully expand our restaurant
operations, our growth rate and results of operations will be adversely affected.
A critical factor in our future success is our ability to
expand our restaurant operations successfully, which will depend in large part on our ability to open new restaurants in a profitable manner. We anticipate that our new restaurants will generally take several months or even longer to reach targeted
productivity levels due to the inefficiencies typically associated with new restaurants, including lack of initial market and consumer awareness, the need to hire and train sufficient management and restaurant personnel and other factors. The
opening of new restaurants can also have either an expected or an unintended effect on the sales levels at existing restaurants. We cannot guarantee that any restaurant we open will obtain operating results similar to those of our existing
restaurants. If we are unable to open and operate new restaurants successfully, our growth rate and our results of operations will be adversely affected. Our expansion plans may also be impacted by the delay or cancellation of potential new sites by
developers and landlords, which may become more common as a result of economic deterioration or tightening credit markets.
We intend to open new
restaurants in both established and new markets. Opening new restaurants in established markets generally provides some advantages in the form of stronger levels of initial consumer awareness, trial and usage, as well as greater leverage of certain
supply chain and field supervision resources. On the other hand, there is a
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risk that a portion of the sales of existing restaurants in the market may transfer to newly opened restaurants in the same market, resulting in negative pressure on our overall comparable
restaurant sales metric. While we do not generally select locations for our new restaurants where we believe that a significant sales transfer will likely occur, some unexpected sales transfer may inadvertently occur.
Some of our new restaurants are planned for new markets where we have little or no operating experience. New markets may have different competitive
conditions, consumer tastes and discretionary spending patterns than our existing markets. As a result, new restaurants in those markets may be less successful than restaurants in our existing markets. Consumers in a new market may not be familiar
with the BJs brand. We also may find it more difficult to hire, motivate and retain qualified employees in new markets. Restaurants opened in new markets may also have lower average restaurant sales than restaurants opened in our existing
markets, and may have higher construction, occupancy or operating costs than restaurants in existing markets. Sales at restaurants opened in new markets may take longer to achieve margins typical of mature restaurants in existing markets or may
never achieve these targeted margins thereby affecting our overall profitability. As we expand into new markets and geographic territories, our operating cost structures may not resemble our experience in existing markets. Because there will
initially be fewer restaurants in a given market, our ability to optimally leverage our field supervision, marketing and supply chain resources will be limited for a period of time. Further, our overall new restaurant development and operating costs
may increase due to more lengthy geographic distances between restaurants resulting in higher purchasing, preopening, labor, transportation and supervision costs. The performance of restaurants in new markets will often be less predictable.
As part of our ongoing restaurant expansion and growth strategy, we may consider the internal development or acquisition of additional restaurant concepts in
the future. We may not be able to internally develop or acquire additional concepts that are as profitable as our existing restaurants. Additionally, growth through acquisitions will also involve additional financial and operational risks.
Our ability to open new restaurants on schedule in accordance with our targeted capacity growth rate may be adversely affected by delays or problems
associated with securing suitable restaurant locations, leases and licenses, recruiting and training qualified managers and hourly employees and by other factors, some of which are beyond our control and difficult to forecast accurately.
In order to achieve our targeted capacity rate of new restaurant growth, we must identify suitable restaurant locations and successfully
negotiate and finalize the terms of restaurant leases at a number of these locations. Due in part to the unique nature of each proposed restaurant location, we cannot predict the timing or ultimate success of our site selection process or these
lease negotiations. Delays encountered in negotiating, or our inability to finalize to our satisfaction, the terms of a restaurant lease may delay our actual rate of new restaurant growth and cause a significant variance from our targeted capacity
growth rate. In addition, our scheduled rate of new restaurant openings may be adversely affected by other factors, some of which are beyond our control, including the following:
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the availability and cost of suitable restaurant locations for development;
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our ability to compete successfully for suitable restaurant locations;
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the availability of adequate financing;
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the timing of delivery of leased premises from our landlords so we can commence our
build-out
construction activities;
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construction and development costs;
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labor shortages or disputes experienced by our landlords or outside contractors, including their ability to manage union activities such as picketing or hand billing which could delay construction and could create
adverse publicity for our business and operations;
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any unforeseen engineering or environmental problems with the leased premises;
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our ability to hire, train and retain additional management and restaurant personnel;
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our ability to secure governmental approvals and permits, including liquor licenses;
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our ability to make satisfactory arrangements for the delivery of our proprietary craft beer;
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our ability to successfully promote our new restaurants and compete in the markets in which our new restaurants are located;
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weather conditions or natural disasters; and
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general economic conditions.
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Access to sources of capital and our ability to raise capital in the future may be limited, which could
adversely affect our business and our expansion plans.
Our ability to successfully grow our business depends, in part, on the availability of
adequate capital to finance the development of additional new restaurants and other growth related expenses. Changes in our operating plans, acceleration of our expansion plans, a decision to acquire another restaurant concept, lower than
anticipated revenues, unanticipated and/or uncontrollable events in the capital or credit markets that impact our liquidity, lower than anticipated tenant improvement allowances offered by landlords, increased expenses or other events, including
those described in this Annual Report on Form
10-K,
may cause us to seek additional debt or equity financing on an accelerated basis in the event our cash flow from operations is insufficient. Financing may
not be available on acceptable terms, or at all, and our failure to raise capital when needed could adversely affect our growth and other plans, as well as our financial condition. Additional equity financing, if available, may be dilutive to the
holders of our common stock and adversely affect the price of our common stock. Debt financing, if available, may involve significant cash payment obligations, covenants and financial ratios that restrict our ability to operate and grow our
business, and would cause us to incur additional interest expense and financing costs. In addition, disruptions in the global credit and equity markets, including unanticipated and/or uncontrollable events, may have an adverse effect on our
liquidity and our ability to raise additional capital if and when required.
We may issue additional equity securities without the consent of
shareholders and such issuances could adversely affect our stock price and the rights of existing shareholders.
We are not restricted from
issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. Our Board of
Directors is authorized to issue additional shares of common stock and additional classes or series of preferred stock without any action on the part of the shareholders. The Board of Directors also has the discretion, without shareholder approval,
to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, or winding up of our business and
other terms. If we issue preferred shares in the future that have a preference over our common stock with respect to dividends or upon liquidation, dissolution or winding up, or if we issue preferred shares with voting rights that dilute the voting
power of our common stock, the rights of our common shareholders or the market price of our common stock could be adversely affected.
Any failure
of our existing or new restaurants to achieve expected results could have a negative impact on our consolidated revenues and financial results, including the potential impairment of long-lived assets.
The results achieved by our recently opened restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in
other locations. There can be no assurance that any new restaurant that we open will have similar operating results to those of prior restaurants. Our new restaurants typically take several months, or even longer, to reach targeted levels of
productivity due to inefficiencies typically associated with new restaurants. Accordingly, incremental sales from newly-opened restaurants generally do not make a significant contribution to our total operating profits in their initial months of
operation. We make certain estimates and projections with regard to individual restaurant operations, as well as our overall performance in connection with our impairment analyses for long-lived assets in accordance with U.S. GAAP. An impairment
charge is required when the carrying value of the restaurant exceeds the estimated undiscounted future cash flows of the restaurant, in which case the restaurant assets are written down to estimated fair value. The projection of restaurant future
cash flows used in this analysis requires the use of judgment and a number of estimates. If the restaurants actual results differ from our estimates, charges to impair the restaurants assets may be required. If impairment charges are
significant, our results of operations could be adversely affected.
Our growth may strain our infrastructure and resources, which could slow our
development of new restaurants and adversely affect our ability to manage our existing restaurants.
We plan to continue opening new restaurants
and may also consider the internal development or acquisition of additional restaurant concepts in the future. Additionally, we may also evaluate potential joint ventures to supplement our pace of expansion. Our continued expansion will increase
demands on our management team, restaurant
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management systems and resources, financial controls and information systems. These increased demands may adversely affect our ability to open new restaurants and to manage our existing
restaurants. If we fail to continue to improve our infrastructure or to manage other factors necessary for us to meet our expansion objectives, our growth rate and operating results could be adversely affected.
Any decision to either reduce or accelerate the pace of openings may positively or adversely affect our comparative financial performance.
Our opening costs continue to be significant and the amount incurred in any single year or quarter is dependent on the number of restaurants expected to be
opened during that time period. As such, our decision to either decrease or increase the rate of openings may have a significant impact on our financial performance for the period of time being measured. Therefore, if we decide to reduce our
openings, our comparable opening costs will be lower and the short-term effect on our comparative financial performance will be favorable. Conversely, if the rate at which we develop and open new restaurants is increased to higher levels in the
future, the resulting increase in opening costs will have an unfavorable short-term impact on our comparative financial performance. At some future point, our pace of openings and annual rate of growth in total restaurant operating weeks will begin
to gradually decelerate as we become a more mature company.
Our recent trends in average restaurant sales or our trends in comparable restaurant
sales may not be indicative of future trends or future operating results.
Our recent average restaurant sales and comparable restaurant sales
trends may not be indicative of future trends or future operating results. Our ability to operate new restaurants profitably and increase average restaurant sales and comparable restaurant sales will depend on many factors, some of which are beyond
our control, including:
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our ability to execute our business strategy effectively;
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our ability to execute productively and efficiently within the four walls of each restaurant;
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our menu development and pricing strategy;
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our ability to continue deploying menu, beverage, capital expenditure and technological innovations that have the opportunity to increase customer visit frequency and spending per visit;
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initial sales performance by new restaurants, some of which may be unusually strong and thus difficult to increase further;
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intrusions into our restaurant trade areas by new restaurants operated by competitors;
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the timing of new restaurant openings and related expenses;
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changing demographics, consumer tastes or discretionary spending;
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our ability to develop restaurants in geographic locations that do not compete with or otherwise adversely affect the sales of our existing restaurants;
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overall brand awareness in new markets or existing markets where we may develop new restaurants;
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maturation of the casual dining segment;
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levels of competition in one or more of our markets; and
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general economic conditions, credit markets and consumer confidence.
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We believe that certain of our
restaurants operate at or near their effective productive capacities. As a result, we may be unable to grow or maintain comparable restaurant sales at those restaurants, particularly if additional restaurants are opened near the existing locations
either by us or by our competitors.
Any failure to drive both short-term and long-term profitable sales growth through continued enhancements to the
BJs restaurant concept and brand, coupled with any slippage in restaurant operational execution, could result in poor financial performance. As part of our business strategy, we intend to drive profitable sales growth by increasing sales at
existing restaurants and by opening new restaurants. This strategy involves numerous risks, and we may not be able to achieve our growth objectives. If we are unable to maintain BJs brand relevance and restaurant operational excellence to
achieve sustainable comparable restaurant sales growth, we may have to consider slowing the pace of new restaurant openings. BJs short-term sales growth could be impacted if we are unable to drive near-term growth in customer traffic, and
long-term sales growth could be impacted if we fail to continue to evolve BJs to maintain its relevance, contemporary energy and overall value and appeal to the consumer. The casual dining segment, in general, has not seen
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any significant growth in customer traffic in several years. If this trend continues, our ability to grow customer traffic at our restaurants will depend on our ability to increase our market
share within the casual dining segment.
Adverse changes in our average restaurant revenues and comparable restaurant sales could have an adverse effect
on our common stock or increase the volatility of the price of our common stock.
Our menu development and marketing programs may not be successful.
We expect to continue investing in certain menu, marketing and merchandising initiatives that are intended to attract and retain customers for
our restaurants. Not all of such initiatives may prove to be successful and may thereby result in incremental expenses incurred without the benefit of higher revenues, or may result in other unfavorable economic consequences. Additionally, if our
competitors were to increase their spending on menu development and marketing initiatives, or if our menu and marketing initiatives were to be less effective than those of our competitors, we could experience a material adverse effect on our results
of operations.
We have experienced significant increases in the costs of certain food, labor, energy and supply items in the past, and we may be
unable to successfully and sufficiently raise menu prices to offset rising costs and expenses.
In the past, we have experienced dramatic price
increases of certain items necessary to operate our restaurants and brewing operations, including increases in the cost of food, commodities, minimum wage, employee benefits, insurance arrangements, construction, energy and other costs. To manage
this risk in part, we attempt to enter into fixed price purchase commitments, with terms up to one year, for many of our commodity requirements. However, it may not be possible for us to enter into fixed-price contracts for an entire fiscal year for
many of our commodity requirements. Additionally, we utilize menu price increases to help offset the increased cost of commodities, minimum wage and other costs. However, there is no guarantee that our menu price increases will be accepted by our
customers. If our costs increase, our operating margins and results of operations will be adversely affected if we are unable to increase our menu prices to offset such increased costs or if our increased menu prices result in less guest traffic.
Our future operating results may fluctuate significantly due to expenditures required to open new restaurants.
The expenditures required to develop new restaurants are significant. Actual costs may vary significantly depending upon a variety of factors, including the
site type, the square footage and layout of each restaurant, and conditions in the local real estate market. The combination of our relatively small number of existing restaurants, the significant investment associated with each new restaurant and
the average revenues of our new restaurants relative to our total revenue may cause our results of operations to fluctuate significantly. Moreover, due to our relatively small base of existing restaurants, poor operating results at any one
restaurant or a delay or cancellation of the planned opening of a restaurant could adversely affect our entire business, making the investment risks related to any one location much greater than those associated with many other larger,
well-established restaurant chains.
Our inability to renew existing leases on favorable terms may adversely affect our results of operations.
The majority of our restaurants are located on leased premises and are subject to varying lease-specific arrangements. Some of our leases require
base rent that is subject to regional
cost-of-living
increases and other leases include base rent with specified periodic increases. Other leases are subject to renewal
at fair market value, which could involve substantial increases. Additionally, many leases require contingent rent based on a percentage of gross sales. There can be no assurance that we will be able to renew our expiring leases after exercising all
remaining renewal options; therefore we may incur additional costs to operate our restaurants, including increased rent and other costs related to our renegotiation of lease terms for an existing leased premise or for a new lease in a desirable
location and the relocation and development of a replacement restaurant.
The success of our restaurants depends in large part on leased locations. As
demographic and economic patterns change, current locations may or may not continue to be attractive or profitable. Possible declines in trade areas where our restaurants are located or adverse economic conditions in surrounding areas could result
in reduced revenues in those locations. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost.
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We are subject to all of the risks associated with leasing space subject to long-term
non-cancelable
leases.
Generally our leases are net leases, which require us to pay all of the cost
of insurance, taxes, maintenance and utilities and cannot be canceled. Additional sites that we lease are likely to be subject to similar long-term
non-cancelable
terms. If an existing or future restaurant is
not profitable and we decide to close it, we may be required to continue to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. These potential increased occupancy
costs could materially adversely affect our business, financial condition or results of operations.
Our operations could be adversely affected if
our suppliers are not able to continue to do business with us or are forced to alter the terms on which they do business with us.
If we are
forced to find alternative suppliers for key services, whether due to demands from the vendor or the vendors bankruptcy, that could be a distraction to us and adversely impact our business. If any of our major suppliers or a large number of
other suppliers suspend or cease operations, we may have difficulty keeping our restaurants fully supplied with the commodities and supplies that we require. In addition, we currently rely on one or a limited number of suppliers for certain key menu
ingredients. If we were forced to suspend serving one or more of our menu items, that could have a significant adverse impact on our restaurant customer traffic and the public perceptions of us, which would be harmful to our operations.
A significant number of our restaurants are concentrated in California, Texas and Florida, which make us particularly sensitive to economic, regulatory,
weather and other risk factors and conditions that are more prevalent in those states.
A significant number of our restaurants are concentrated
in California, Texas and Florida. As a result, we are particularly susceptible to adverse trends and economic conditions in those states. Many states and municipalities in which our restaurants are located may experience severe revenue and budget
shortfalls. Additionally, changes in state and municipal-level regulatory requirements, such as increases to the minimum wage rate, income taxes, unemployment insurance, and other taxes as well as mandatory healthcare coverage or paid leave in some
cities where we operate or may desire to operate restaurants, may adversely impact our financial results. Additionally, we believe that California is subject to a greater risk for earthquakes, fires, water shortages, energy fluctuations and other
natural and
man-made
disasters than most other states.
We are dependent upon consumer trends and upon high
levels of consumer traffic at the sites where our restaurants are located, and any adverse change in such consumer trends or traffic levels could adversely affect our business, revenues and results of operations.
Due to the nature of the restaurant industry, we are dependent upon consumer trends with respect to the publics tastes, eating habits, public perception
toward alcohol consumption and discretionary spending priorities, all of which can shift rapidly. We also are dependent upon high consumer traffic rates at the sites surrounding our restaurants, which are primarily located in high-activity areas
such as urban, retail,
mixed-use
and lifestyle centers, to attract customers to our restaurants. In general, such consumer trends and visit frequencies are significantly affected by many factors, including
national, regional or local economic conditions, changes in area demographics, public perception and attitudes, increases in regional competition, food, liquor and labor costs, traffic and shopping patterns, weather, natural disasters, interest
rates,
co-tenancies
in urban, retail and
mixed-use
and lifestyle centers and the availability and relative cost of gasoline. Our success will depend, in part, on our
ability to anticipate and respond to such changing consumer preferences, tastes, eating and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. Any adverse change in
any of the above factors and our inability to respond to such changes could cause our restaurant volumes to decline and adversely affect our business, revenues and results of operations.
Our success depends on our ability to compete effectively in the restaurant industry.
The restaurant industry is highly competitive. We compete on the basis of the taste, quality and price of food offered, customer service, brand name
identification, beer quality and selection, facilities attractiveness, restaurant location, atmosphere and overall dining experience. Our competitors include a large and diverse group of restaurant chains and
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individual restaurants that range from independent local operators that have opened restaurants in various markets to well-capitalized national restaurant companies. In addition, we compete with
other restaurants and retailers for real estate. We also face growing competition as a result of the trend toward convergence in grocery, deli and restaurant services, particularly in the supermarket industry which offers convenient
meals in the form of improved entrées and side dishes from the deli section. Many of our competitors have substantially greater financial, marketing and other resources than we do.
Restaurant consumers are highly focused on overall value and price perception. If other restaurants are able to promote and deliver a higher degree of
perceived value through heavy discounting or other methods, our customer traffic levels may suffer which would adversely impact our revenues and profitability. In addition, with improving product offerings at fast-casual restaurants,
quick-service restaurants and grocery stores, consumers may choose to trade down to these alternatives, which could also negatively affect our financial results.
We believe that we have built a favorable reputation for the quality and differentiation of our restaurant concept. We also believe that we must continue to
re-invest
in our core established restaurant operations to further protect and grow the overall consumer value of our concept so that it will continue to be relevant in the future. Any incident that
erodes consumer trust in, or their attraction to, our concept could significantly reduce its value. If consumers perceive or experience any material reduction in food quality, service or ambiance, or in any way believe we materially failed to
deliver a consistently positive dining experience, the consumer value of our concept could suffer.
Negative publicity about us, our
restaurants, other restaurants, or others across the food supply chain, due to food borne illness or about other reasons, whether or not accurate, could adversely affect the reputation and popularity of our restaurants and our results of operations.
The good reputation of our restaurants is a key factor to the success of our business. Incidents that occur at any of our restaurants, or at
restaurants operated by other foodservice providers or generally in the food supply chain, could be damaging to the restaurant industry overall, may specifically harm our brand and reputation and may quickly result in negative publicity for us,
which could adversely affect our reputation and popularity with our customers. Moreover, negative publicity resulting from poor food quality, illness, injury, food tampering or other health concerns, whether related to one of our restaurants, to the
restaurant industry, or to the beef, seafood, poultry or produce industries (such as negative publicity concerning the accumulation of carcinogens in seafood,
e-coli,
hepatitis A, Avian Flu, listeria,
salmonella, and other food-borne illnesses), or operating problems related to one or more of our restaurants, could adversely affect sales for all of our restaurants and make our brand and menu offerings less appealing to consumers.
Although we have followed industry standard food safety protocols in the past and continue to enhance our food safety and quality assurance procedures, no
food safety protocols can completely eliminate the risk of food-borne illness in any restaurant. Even if food-borne illnesses arise from conditions outside of our control, the negative publicity from any such illnesses is likely to be significant.
If our restaurant customers or employees become ill from food-borne illnesses, we could be forced to temporarily close the affected restaurants.
In
addition, our brewing operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally
introduced into products or packaging. While we have not experienced any serious contamination problem in our products, the occurrence of such a problem could result in a costly product recall and serious damage to our reputation for product
quality, as well as claims for product liability.
New information or attitudes regarding diet, health and the consumption of alcoholic beverages
could result in changes in regulations and consumer consumption habits that could adversely affect our results of operations.
Regulations and
consumer eating habits may change as a result of new information or attitudes regarding diet and health. Such changes may include regulations that impact the ingredients and nutritional content of the food and beverages we offer. For example,
several municipalities and states have approved restrictions on the use of trans-fats by restaurants. The success of our restaurant operations is dependent, in part, upon our ability to effectively respond to changes in any consumer health
regulations and our ability to adapt our menu offerings to trends in food consumption. If consumer health regulations or consumer eating habits change significantly, we may be required to modify or delete certain menu items. To the extent we are
unable to respond with appropriate changes to our menu offerings, it could
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materially affect customer demand and have an adverse impact on our results of operations. The risks and costs associated with nutritional disclosures on our menus could also impact our
operations, particularly given differences among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure, ordinary variations in food preparation among our own restaurants, and the need to
rely on the accuracy and completeness of nutritional information obtained from third party suppliers.
The gross profit margin on our sales of alcoholic
beverages is generally higher than our gross profit margin on sales of food items. The alcoholic beverage industry has become the subject of considerable societal and political attention in recent years due to increasing public concern over
alcohol-related social problems, including driving under the influence, underage drinking and health consequences from the misuse of alcohol, including alcoholism. As an outgrowth of these concerns, the possibility exists that advertising by beer
producers could be restricted, that additional cautionary labeling or packaging requirements might be imposed, that further restrictions on the sale of alcohol might be imposed, or that there may be renewed efforts to impose increased excise or
other taxes on beer or alcohol related items sold in the United States. If beer or alcohol consumption were to come into disfavor among domestic drinkers, or if the domestic beer industry were subjected to significant additional governmental
regulations, our sales and profits could be adversely affected.
Health concerns arising from outbreaks of flu viruses or other diseases, or
regional or global health pandemics, could severely affect our business.
The United States and other countries have experienced, or may
experience in the future, outbreaks of viruses, such as norovirus, Avian Flu or SARS, and H1N1 or swine flu, or other diseases such as bovine spongiform encephalopathy, commonly known as mad cow disease. To the
extent that a virus or disease is food-borne, or perceived to be food-borne, future outbreaks may adversely affect the price and availability of certain food products and cause our customers to eat less of a product. For example, health concerns
relating to the consumption of beef or to specific events such as the outbreak of mad cow disease may adversely impact sales of our beef-related menu items. In addition, public concern over avian flu may cause fear about the
consumption of chicken, eggs and other products derived from poultry. The inability to serve beef or poultry-based products would restrict our ability to provide a variety of menu items to our customers. If we change our menu in response to such
concerns, we may lose customers who do not prefer the new menu, and we may not be able to sufficiently attract new customers to produce the revenue needed to restore the profitability of our restaurant operations. We also may generate different or
additional competitors for our intended customers as a result of such a menu change and may not be able to successfully compete against such competitors. If a virus is transmitted by human contact, our employees or customers could become infected,
or could choose, or be advised, to avoid gathering in public places, any of which could adversely affect our restaurant customer traffic and our ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions
at the corporate level. We also could be adversely affected if jurisdictions in which we have restaurants impose mandatory closures, seek voluntary closures or impose restrictions on operations. Even if such measures are not implemented and a virus
or other disease does not spread significantly, the perceived risk of infection or significant health risk may adversely affect our business.
A health
pandemic is a disease outbreak that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time. We believe that our restaurants have one of the highest levels of customer traffic per square foot in
the casual dining segment of the restaurant industry. Our restaurants are places where people can gather together for human connection. Customers might avoid public gathering places in the event of a health pandemic, and local, regional or national
governments might limit or ban public gatherings to halt or delay the spread of disease. The impact of a health pandemic on us might be disproportionately greater than on other casual dining concepts that have lower customer traffic and that depend
less on the gathering of people.
Our operations are susceptible to changes in the cost of food, labor and related employee benefits (including, but
not limited to, group health insurance coverage for our employees), brewing and energy which may adversely affect our profitability.
Our
profitability depends, in part, on our ability to anticipate and effectively react to changes in food, labor, utilities and supply costs. Our supply chain department negotiates prices for all of our ingredients and supplies through contracts (with
terms of one month up to one year, or longer in a few cases), spot market purchases or commodity
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pricing formulas. Furthermore, various factors beyond our control, including adverse weather conditions and governmental regulations, could also cause our food and supply costs to increase. We
cannot predict whether we will be able to anticipate and react to changing food and supply costs by adjusting our purchasing practices. A failure to do so could adversely affect our operating results or cash flows from operations. We also have a
single or a limited number of suppliers for certain of our commodity and supply items. Accordingly, supply chain risk could increase our costs and limit the availability of some products that are critical to our restaurant and brewing operations.
The overall cost environment for food commodities can be volatile primarily due to domestic and worldwide agricultural supply/demand and other
macroeconomic factors that are outside of our control. The availability and prices of food commodities are also influenced by energy prices, droughts, animal-related diseases, natural disasters, increased
geo-political
tensions, the relationship of the dollar to other currencies, and other issues. Virtually all commodities purchased and used in the restaurant industry (meats, grains, oils, dairy products, and
energy) have varying amounts of inherent price volatility associated with them. Our suppliers also may be affected by higher costs to produce and transport commodities used in our restaurants and brewpubs, higher minimum wage and benefit costs, and
other expenses that they pass through to their customers, which could result in higher costs for goods and services supplied to us. Increases in minimum wage, health care costs and other benefit costs may have a material adverse effect on our labor
costs. While we attempt to manage these factors by offering a diversified menu and by contracting for our key commodities for extended periods of time whenever feasible and possible, there can be no assurance that we will be successful in this
respect due to the many factors that are outside of our control. In addition, raw materials that we may purchase on the international market are subject to fluctuations in both the value of the U.S. dollar and increases in local demand, which may
increase our costs and negatively impact our profitability.
We and our major independent third party brewing partners purchase a substantial portion of
brewing raw materials and products, primarily malt and hops, from a limited number of domestic and foreign suppliers. We purchase both North American and European malts and hops for our beers. We purchase a majority of our malts from a single
supplier with multiple sources of malts. We generally enter into
one-year
purchase commitments with our malt and hops suppliers, based on the projected future volumes and brewing needs. We are exposed to the
quality of the barley crop each year, and significant failure of a crop could adversely affect our beer costs. Changes in currency exchange rates and freight costs can also result in increased prices. There are other malt vendors available that are
capable of supplying all of our needs. We use American and German hops for our beers. We enter into purchase commitments with several hops suppliers, based on our projected future volumes and brewing needs. However, the quality and availability of
the hops may be materially adversely affected by factors such as adverse weather and changes in currency exchange rates, resulting in increased prices. We attempt to maintain at least six months supply of essential hop varieties on hand in
order to limit the risk of an unexpected reduction in supply. We store our hops in multiple cold storage warehouses, both at our brewpubs and at our suppliers, to minimize the impact of a catastrophe at a single site. Hops and malt are agricultural
products and, therefore, many outside factors, including weather conditions, farmers rotating out of hops or barley to other crops, government regulations and legislation affecting agriculture, could affect both price and supply.
Our restaurant-level operating margins are also affected by fluctuations in the availability and cost of utilities services, such as electricity and natural
gas. Interruptions in the availability of gas, electric, water or other utilities, whether due to aging infrastructure, weather conditions, fire, animal damage, trees, digging accidents or other reasons largely out of our control, may adversely
affect our operations. In addition, weather patterns in recent years have resulted in lower than normal levels of rainfall in certain areas that could produce droughts in key states such as California, thus impacting the price of water and the
corresponding prices of commodities grown in states facing drought conditions. There is no assurance that we will be able to maintain our utility and commodity costs at levels that do not have a material adverse effect on our operations.
If our distributors or suppliers do not provide food and beverages to us in a timely fashion, we may experience short-term supply shortages, increased
food and beverage costs and quality control problems.
We currently depend on national and regional food distribution service companies, as well
as other food manufacturers and suppliers, to provide food and beverage products to all of our restaurants. We also rely on independent third party brewers and many local beer distributors to provide us with beer for our restaurants. The operations
of our distributors, suppliers and independent third party brewers are subject to risks including labor disputes, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could
limit their
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ability to timely provide us with acceptable products. Additionally, under the force majeure provisions in most of our agreements with suppliers, certain unexpected and disruptive
events may excuse a supplier from performing. If our distributors, suppliers and independent third party brewers cease doing business with us, or cannot make a scheduled delivery to us, or are unable to obtain credit in a tightened credit market or
experience other issues, we could experience short-term product supply shortages in some or all of our restaurants and could be required to purchase food, beer and beverage products from alternate suppliers at higher prices. We may also be forced to
temporarily remove popular items from the menu offering of our restaurants. If alternative suppliers cannot meet our current product specifications, the consistency and quality of our food and beverage offerings, and thus our reputation, customer
patronage, revenues and results of operations, could be adversely affected.
With respect to potential liability claims related to our food, beer and
beverage products, we believe we have sufficient primary or excess umbrella liability insurance in place. However, this insurance may not continue to be available at a reasonable cost or, if available, may not be adequate to cover all claims. We
generally seek contractual indemnification and insurance coverage from our key suppliers of food, beer and beverages, but this indemnification or insurance coverage is limited, as a practical matter, by the creditworthiness of the indemnifying party
and the insured limits of any insurance provided by suppliers.
Pursuant to various laws and regulations, the majority of our proprietary craft beer must
be distributed to our restaurants through independent wholesale beer distributors, whether we produce the beer or it is produced by independent third party brewers. Although we currently have arrangements with a sufficient number of beer
distributors in all markets where we operate restaurants, our continued national expansion will require us to enter into agreements with additional beer distributors. No assurance can be given that we will be able to maintain or secure additional
beer distributors on terms favorable to us. Changes in control or ownership of the participants in our current beer distribution network could lead to less willingness on the part of certain distributors to carry our proprietary craft beer. Our beer
distribution agreements are generally terminable by the distributor on short notice. While these beer distribution agreements contain provisions regarding our enforcement and termination rights, some state laws prohibit us from readily exercising
these contractual rights. Our ability to maintain our existing beer distribution agreements may also be adversely affected by the fact that many of our distributors are reliant on one of the major beer producers for a large percentage of their
revenue and, therefore, they may be influenced by such producers. If our existing beer distribution agreements are terminated, we may not be able to enter into new distribution agreements on substantially similar terms or it may take some time to
enter into a replacement agreement, which may result in an increase in the delivered cost of beer to our restaurants.
Failure to protect our
trademarks, service marks, trade secrets or other intellectual property could adversely affect our business.
Our business prospects depend in
part on our ability to develop favorable consumer recognition of our brands, including the BJs Restaurants name in particular. Although BJs is a federally registered trademark, there are many other retailers, restaurants and other types
of businesses using the name BJs in some form or fashion throughout the United States. While we intend to aggressively protect and defend our trademarks, service marks, trade dress, trade secrets and other intellectual property,
particularly with respect to their use in our restaurant and brewing operations, they could be imitated or appropriated in ways that we cannot prevent. Alternatively, third parties may attempt to cause us to change our trademarks, service marks or
trade dress or not operate in a certain geographic region or regions if our names are deemed confusingly similar to their prior trademarks, service marks or trade dress. We may also encounter claims from prior users of similar intellectual property
in areas where we operate or intend to conduct operations. This could harm our image, brand or competitive position and cause us to incur significant penalties and costs. In addition, we rely on trade secrets, proprietary
know-how,
concepts and recipes. Our methods of protecting this information may not be adequate. While we believe that we take reasonable protective actions with respect to our intellectual property, these actions
may not be sufficient to prevent, and we may not be aware of all incidents of, unauthorized usage or imitation by others. Moreover, we may face claims of misappropriation or infringement of third parties rights that could interfere with our
use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future and may result in a judgment or monetary damages. We do not maintain confidentiality
and
non-competition
agreements with all of our employees or suppliers. Moreover, even with respect to the confidentiality and
non-competition
agreements we have, we
cannot assure that those agreements will not be breached, that they will provide meaningful protection or that adequate remedies will be
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available in the event of an unauthorized use or disclosure of our proprietary information. If competitors independently develop or otherwise obtain access to our trade secrets, proprietary
know-how
or recipes, the appeal of our restaurants could be reduced and our business could be harmed.
Federal,
state and local beer, liquor and food service regulations may have a significant adverse impact on our operations.
We are required to operate in
compliance with federal laws and regulations relating to alcoholic beverages administered by the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Department of Treasury, as well as the laws and licensing requirements for alcoholic beverages of
states and municipalities where our restaurants are or will be located. In addition, each restaurant must obtain a food service license from local authorities. Failure to comply with federal, state or local regulations could cause our licenses to be
revoked and force us to cease the brewing or sale of alcoholic beverages, or both, or the serving of food at our restaurants. Additionally, state liquor laws may prevent or impede the expansion of our restaurants into certain markets. The liquor
laws of certain states prevent us from selling the beer brewed at our restaurants. Any difficulties, delays or failures in obtaining such licenses, permits or approvals could delay or prevent the opening of a restaurant in a particular area or
increase the costs associated therewith. In addition, in certain states, including states where we have existing restaurants or where we plan to open a restaurant, the number of liquor licenses available is limited, and licenses are traded on the
open market. Liquor, beer and wine sales comprise a significant portion of our revenues. If we are unable to maintain our existing licenses, our customer patronage, revenues and results of operations could be adversely affected. Or, if we choose to
open a restaurant in those states where the number of available licenses is limited, the cost of a new license could be significant.
Brewing operations
require various federal, state, and local licenses, permits and approvals. Our restaurants and
on-site
brewpubs operate pursuant to exceptions to the tied house laws, which created the three
tier system of liquor distribution. These tied house laws were adopted by all of the states after the repeal of Prohibition and, generally, prohibit brewers from holding retail licenses and prohibit vertical integration in
ownership and control among the three tiers. Brewing restaurants and brewpubs operate under exceptions to these general prohibitions. Over the last 25 years, nearly all of the states have adopted laws and regulations permitting brewing
restaurants and brewpubs; however, the privileges and restrictions for brewpubs and brewing restaurants vary from state to state.
We apply for our liquor
and brewing licenses with the advice of outside legal and licensing consultants. Generally, our brewing restaurants are licensed as retailers with limited privileges to brew beer on the restaurant premises, and we do not have the same privileges as
a microbrewery. Other restrictions imposed by law may prevent us from operating both brewing restaurants and
non-brewing
restaurants in some states. We are at risk that a states regulations concerning
brewing restaurants or the interpretation of these regulations may change. Because of the many and various state and federal licensing and permitting requirements, there is a significant risk that one or more regulatory agencies could determine that
we have not complied with applicable licensing or permitting regulations or have not maintained the approvals necessary for us to conduct business within its jurisdiction. Even after the issuance of our licenses, our operations could be subject to
differing interpretations of the tied house laws and the requirements of the three tier system of liquor distribution in any jurisdiction that we conduct business. Any such changes in interpretation may adversely impact our
current model of brewing beer or supplying beer, or both, to our restaurants in that state, and could also cause us to lose, either temporarily or permanently, the licenses, permits and registrations necessary to conduct our restaurant operations,
and subject us to fines and penalties.
The manufacture and sale of alcoholic beverages is a highly regulated and taxed business. Our operations are
subject to more restrictive regulations and increased taxation by federal, state, and local governmental entities than are those of
non-alcohol
related beverage businesses. Federal, state, and local laws and
regulations govern the production and distribution of beer, including permitting, licensing, trade practices, labeling, advertising, marketing, distributor relationships, and related matters. Federal, state, and local governmental entities also levy
various taxes, license fees, and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Failure to comply with applicable federal, state, or local laws and regulations could result in higher taxes,
penalties, fees, and suspension or revocation of permits, licenses or approvals.
Increasing the federal and/or state excise tax on alcoholic beverages,
or certain types of alcoholic beverages, is frequently proposed in various jurisdictions either to increase revenues or discourage purchase by underage drinkers. If
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adopted, these measures could affect some or all of our proprietary craft beer products. If federal or state excise taxes are increased, we may have to raise prices to maintain our current profit
margins. Higher taxes may reduce overall demand for beer, thus negatively impacting sales of our beer. Some states have also been reviewing the state tax treatment for flavored malt beverages which could result in increased costs for us, as well as
decreased sales. Further federal or state regulation may be forthcoming that could further restrict the distribution and sale of alcohol products.
Our dependence on independent third party brewers and manufacturers for some of our beer could have an adverse effect on our operations if they cease to
supply us with our proprietary craft beer.
Our proprietary craft beer is a key factor in the success of our business. Each year, our brewing
operations department forecasts our annual beer requirements based on our current restaurant requirements and expansion plans and determines our brewing production. Additionally, in certain states we are either legally required or choose to arrange
for independent third party brewers to brew our beer using our proprietary recipes. If the independent third party brewers cease doing business with us, or cannot make a scheduled delivery to us because of a supply chain or production disruption or
other issues, or if we cannot otherwise satisfy our internal brewing requirements, we could experience short-term supply shortages in some or all of our restaurants which may result in a loss of revenue. Potential disruptions include labor issues,
governmental and regulatory actions, quality issues, contractual disputes, machinery failures or operational shut downs. Additionally, if these independent third party brewers cease doing business with us, we could be required to purchase or brew
our own beer at higher costs to us, or we may not be able to sell our proprietary craft beer at all, until we are able to secure an alternative supply source. If the independent third party brewers fail to adhere to our proprietary recipe and
brewing specifications, the consistency and quality of beer offerings, and thus our reputation, customer patronage, revenues and results of operations, could be adversely affected. As the brewing industry continues to consolidate, the financial
stability of those brewing operations where we currently contract for our proprietary craft beer production, as well as their ability or willingness to continue to meet our beer production requirements, continues to be a significant risk in our
business model. Accordingly, there can be no guarantees that our proprietary brewing requirements will continue to be met in the future.
From time to
time, we or the independent third party brewers and manufacturers may also experience shortages of kegs necessary to distribute our craft beer. We distribute our craft beer in kegs that are owned by us as well as leased from third party vendors. We
are also responsible for providing kegs to the independent third party brewers that produce our proprietary craft beer.
Our internal brewing,
independent third party brewing and beer distribution arrangements are subject to periodic reviews and audits by various federal, state and local governmental and regulatory agencies and could be adversely affected by different interpretations of
the laws and regulations that govern such arrangements or by new laws and regulations.
Brewing and wholesale operations require various federal,
state and local licenses, permits and approvals. The loss or revocation of any existing licenses, permits or approvals, and/or the failure to obtain any required additional or new licenses, permits, or approvals could have a material adverse effect
on the ability of the Company to conduct its business.
We are subject to periodic audits and reviews by federal, state and local regulatory agencies
related to our internal and independent third party brewing operations. We are particularly subject to extensive regulation at the federal, state and local levels. Permits, licenses and approvals necessary to the U.S. beer business are required from
the Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury Department (TTB), state alcohol beverage regulatory agencies and local authorities in some jurisdictions. Compliance with these laws and regulations can be
costly. TTB permits and registrations can be suspended, revoked or otherwise adversely affected for failure to pay taxes, keep proper accounts, pay fees, bond premises, abide by federal alcoholic beverage production and distribution regulations, or
notify the TTB of any material change. Permits, licenses and approvals from state regulatory agencies can be revoked for many of the same reasons. Our operations are subject to audit and inspection by the TTB at any time. At the state and local
level, some jurisdictions merely require notice of any material change in the operations, management or ownership of the permit or license holder and others require advance approvals, requiring that new licenses, permits or approvals be applied for
and obtained in the event of a change in the management or ownership of the permit or license holder. State and local laws and regulations governing the sale of malt beverages and hard cider within a
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particular state by a supplier or wholesaler vary from locale to locale. Our operations are subject to audit and inspection by state regulatory agencies at any time. Because of the many and
various state and federal licensing and permitting requirements, there is a risk that one or more regulatory agencies could determine that we have not complied with applicable licensing or permitting regulations or have not maintained the approvals
necessary to conduct business within its jurisdiction.
We are routinely subject to new or modified laws and regulations for which we must comply in order
to avoid fines and other penalties. From time to time, new laws and regulations are proposed that could affect the overall structure and effectiveness of the proprietary craft beer production and distribution model we currently utilize. Any such
changes in interpretation may adversely impact our current model of brewing beer or supplying beer, or both, to our restaurants in that state, and could also cause us to lose, either temporarily or permanently, the licenses, permits and
registrations necessary to conduct our restaurant operations, and subject us to fines and penalties.
Government laws and regulations affecting the
operation of our restaurants, including (but not limited to) those that apply to the acquisition and maintenance of our brewing and retail liquor licenses, minimum wages, consumer health and safety, health insurance coverage, nutritional
disclosures, and employment eligibility-related documentation requirements could increase our operating costs, cause unexpected disruptions to our operations and restrict our growth.
Our development and construction of additional restaurants must comply with applicable zoning, land use and environmental regulations. More stringent and
varied requirements of local government bodies with respect to zoning, land use and environmental factors could delay construction of new restaurants and add to their cost in the future. In addition, difficulties or failure in obtaining the required
licenses and approvals could delay, or result in our decision to cancel, the opening of new restaurants.
In addition, various federal and state labor
laws govern our relationship with our employees and affect our operating costs. These laws include minimum wage requirements, overtime pay, meal and rest breaks, unemployment tax rates, workers compensation rates, work eligibility
requirements, employee classification as
exempt/non-exempt
for overtime and other purposes, immigration status and other wage and benefit requirements. In particular, we are subject to the regulations of the
ICE branch of the United States Department of Homeland Security. In addition, some states in which we operate have adopted immigration employment protection laws. Changes to these aforementioned laws or other employment laws or regulations, could
adversely affect our operating results and thus restrict our growth, including additional government-imposed increases in minimum wages, overtime pay, paid time off or leaves of absence, mandated health benefits, increased tax reporting and tax
payment requirements for employees who receive gratuities, a reduction in the number of states that allow tips to be credited toward minimum wage requirements and increased employee litigation, including claims relating to the Fair Labor Standards
Act and comparable state laws.
The U.S. Congress and Department of Homeland Security from time to time consider and may implement changes to federal
immigration laws, regulations or enforcement programs. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the
availability of potential employees. We currently participate in the
E-Verify
program, an Internet-based, free program run by the U.S. government, to verify employment eligibility for all employees
throughout our company. However, use of
E-Verify
does not guarantee that we will properly identify all employees who are ineligible for employment. Even if we operate our restaurants in strict compliance with
ICE and state requirements, some of our employees may not meet federal work eligibility or residency requirements, which could lead to a disruption in our work force. Although we require all of our new employees to provide us with the
government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to seizure and deportation and may subject us to fines, penalties
or loss of our business license in certain jurisdictions. Additionally, a government audit could result in a disruption to our workforce or adverse publicity that could negatively impact our brand and our use of
E-Verify
and/or potential for receipt of letters from the Social Security Administration requesting information (commonly referred to as
no-match
letters) could make it
more difficult to recruit and/or retain qualified employees.
Potential changes in labor laws or increased union recruiting activates could result in
portions of our workforce being subjected to greater organized labor influence. Because we do not franchise, risks associated with hiring and
30
maintaining a large workforce, including increases in wage rates or the cost of employee benefits, compliance with laws and regulations related to the hiring, payment and termination of
employees, and employee-related litigation, may be more pronounced for us than for restaurant companies at which some or all of these risks are borne by franchisees or other operating contractors. Additionally, while we do not currently have any
unionized employees, union organizers have engaged in efforts to organize employees of other restaurant companies. If a significant portion of our employees were to become union organized, our labor costs could increase and our efforts to maintain a
culture appealing only to
top-performing
employees could be impaired. Potential changes in labor laws, including the possible passage of legislation designed to make it easier for employees to unionize, could
increase the likelihood of some or all of our employees being subjected to greater organized labor influence, and could have an adverse effect on our business and financial results by imposing requirements that could potentially increase our costs,
reduce our flexibility, impact our employee culture and our ability to service our customers. In addition, a labor dispute involving some or all of our employees could harm our reputation, disrupt our operations and reduce our revenues and
resolution of disputes may increase our costs.
Additionally, some states, counties and cities have enacted menu labeling laws which are separate of the
federally mandated menu labeling law that is part of the Patient Protection and Affordable Care Act.
Non-compliance
with these laws could result in the imposition of fines and/or the closure of restaurants. We
could also be subject to lawsuits that claim our
non-compliance.
These menu labeling laws could also result in changing consumer preferences which may adversely affect our results of operations and financial
position. We may not be able to adequately adapt our menu offerings to keep pace with developments in current consumer preferences related to nutrition, which may adversely impact our sales.
Some jurisdictions in which we operate have recently enacted new requirements that require us to adopt and implement a Hazard Analysis and Critical Control
Points (HACCP) System for managing food safety and quality. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to
manufacturing, distribution and consumption of the finished product. We expect to incur certain costs to comply with these regulations, and these costs may be more than we anticipate. If we fail to comply with these laws or regulations, our business
could experience a material adverse effect.
The Americans with Disabilities Act of 1990 prohibits discrimination on the basis of disability in public
accommodations and employment. Although our restaurants are designed to be accessible to the disabled, we could be required to make modifications to our restaurants to provide service to, or make reasonable accommodations for, disabled persons.
Non-compliance
with this law and related laws enacted at the state or local level could result in the imposition of fines or an award of damages to private litigants.
The collective impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the
consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and therefore
have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement
actions, fines and civil and criminal liability. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.
Limitations in our insurance coverage or rising insurance costs could adversely affect our business or financial condition in certain circumstances.
We purchase comprehensive insurance coverage, including, but not limited to, property, casualty, directors and officers liability and network
privacy and security liability with coverage levels that we consider appropriate, based on the advice of our outside insurance and risk management advisors. However, such insurance is subject to limitations, including deductibles, exclusions and
maximum liabilities covered. The cost of insurance fluctuates based on market conditions and availability as well as our historical loss trends. Moreover, there are certain types of losses that may be uninsurable or not economically insurable. Such
hazards may include earthquake, hurricane and flood losses and certain employment practices. If such a loss should occur, we would, to the extent that we were not covered for such loss by insurance, suffer a loss of the capital invested, as well as
anticipated profits and cash flow. Punitive damage
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awards are generally not covered by insurance; thus, any awards of punitive damages as to which we may be liable could adversely affect our ability to continue to conduct our business, to expand
our operations or to develop additional restaurants. There is no assurance that any insurance coverage we maintain will be adequate, that we can continue to obtain and maintain such insurance at all or that the premium costs will not rise to an
extent that they adversely affect us or our ability to economically obtain or maintain such insurance.
We retain a substantial portion of our
workers compensation and general liability costs through self-insured retentions and large deductibles. We estimate the liability for these programs through the use of third party actuarial analysis. Any unfavorable changes in trends or any
increase in the actual dollar amount of claims that we incur could have a negative impact on our profitability. Our self-insured retention and large deductible reserves may not be sufficient causing us to record additional expense. Unanticipated
changes may produce materially different financial results than previously reported which could have an adverse impact on operations. Additionally, health insurance costs have risen significantly over the past few years and are expected to continue
to increase. These increases may have a negative impact on our profitability if we are not able to offset the effect of such increases with plan modifications and cost control measures, or by continuing to improve our operating efficiencies.
Our business and future development could be harmed if we are unable to retain key personnel or have difficulties in recruiting qualified personnel.
The success of our business continues to depend on the contributions of our senior management team, both individually and as a group. Our senior
executives have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying expansion opportunities and arranging necessary financing. Losing the services of any of
these individuals could materially adversely affect our business until a suitable replacement is found. We believe that these individuals cannot easily be replaced with executives of equal experience and capabilities. Although we have employment
agreements with our Chief Executive Officer and some of our senior executives, we cannot prevent them from terminating their employment with us.
Litigation, including allegations of illegal, unfair or inconsistent employment practices, could have a material adverse effect on our business.
Our business is subject to the risk of litigation by employees, customers, suppliers, shareholders, government agencies or others through private
actions, class or collective actions, administrative proceedings, regulatory actions or other litigation. These actions and proceedings may involve allegations of illegal, unfair or inconsistent employment practices, including wage and hour
violations and employment discrimination; customer discrimination; food safety issues including poor food quality, food-borne illness, food tampering, food contamination, and adverse health effects from consumption of various food products or
high-calorie foods (including obesity); other personal injury; violation of dram-shop laws (providing an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated party who then causes injury
to himself or a third party); trademark or patent infringement; violation of the federal securities laws; or other concerns. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify.
Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend litigation may
be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our brands, regardless of whether the allegations are valid or we ultimately are found liable. Litigation could impact our
operations in other ways as well. Allegations of illegal, unfair or inconsistent employment practices, for example, could adversely affect employee acquisition and retention. Also, some employment related claims in the area of wage and hour disputes
are not insurable risks. We also are subject to claims and disputes from landlords under our leases, which could lead to litigation or a threatened or actual lease termination. Litigation of any nature may be expensive to defend and may divert money
and managements attention from our operations and adversely affect our financial condition and results of operations.
The occurrence or
threat of extraordinary events, including terrorist attacks, could cause consumer spending to decline, which would adversely affect our sales and results of operations.
The occurrence or threat of extraordinary events, including future terrorist attacks and military and governmental responses and the prospect of future wars,
may result in negative changes to economic conditions likely resulting in
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decreased consumer spending. Additionally, decreases in consumer discretionary spending could impact the frequency with which our customers choose to dine out at restaurants or the amount they
spend on meals while dining out at restaurants, thereby adversely affecting our sales and results of operations. A decrease in consumer discretionary spending could also adversely affect our ability to achieve the benefit of planned menu price
increases to help preserve our operating margins.
Natural disasters could unfavorably affect our operations.
The occurrence of natural disasters, such as fires, hurricanes, freezing weather or earthquakes (particularly in California where our centralized operating
systems and restaurant support center administrative personnel are located) could unfavorably affect our operations and financial performance. Such events could result in physical damage to one or more of our restaurants; the temporary or permanent
closure of one or more of our restaurants or restaurant support center; the temporary lack of an adequate work force in an affected geographical trade area; the temporary or long-term disruption in the supply of food, beverages, beer and other
products to our restaurants; the temporary disruption of electric, water, sewer and waste disposal services necessary for our restaurants to operate; and/or the temporary reduction in the availability of certain products in our restaurants.
We have disaster recovery procedures and business continuity plans in place to address most events of a crisis nature, including hurricanes and other natural
disasters, including back up and
off-site
locations for recovery of electronic and other forms of data and information. However, if we are unable to fully implement our disaster recovery plans, we may
experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating
procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims.
Future changes in financial accounting standards may significantly change our reported results of operations.
Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board (FASB), the
American Institute of Certified Public Accountants (AICPA), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect
on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial
Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.
Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. Generally
accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to, revenue recognition, fair
value of investments, impairment of long-lived assets, leases and related economic transactions, intangibles, self-insurance, income taxes, property and equipment, unclaimed property laws and litigation, and stock-based compensation are highly
complex and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us could significantly change our reported or expected
financial performance.
The market price of our common stock may be volatile and our shareholders may lose all or part of their investment.
The market price of our common stock could fluctuate significantly, and our shareholders may not be able to resell their shares at or above the
price they paid for them. Those fluctuations could be based on various factors in addition to those otherwise described in this Form
10-K
and the following:
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actual or anticipated fluctuations in comparable restaurant sales or operating results, whether in our operations or in those of our competitors;
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changes in financial estimates or opinions by research analysts, either with respect to us or other casual dining companies;
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any failure to meet investor or analyst expectations, particularly with respect to total restaurant operating weeks, number of restaurant openings, comparable restaurant sales, average weekly sales per restaurant, total
revenues, operating margins and net income per share;
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the publics reaction to our press releases, other public announcements and our filings with the SEC;
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actual or anticipated changes in domestic or worldwide economic, political or market conditions, such as recessions or international currency fluctuations;
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changes in the consumer spending environment;
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changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to our business;
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changes in accounting standards, policies, guidance, interpretations or principles;
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short sales, hedging and other derivative transactions in the shares of our common stock;
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future sales or issuances of our common stock, including sales or issuances by us, our directors or executive officers and our significant stockholders;
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changes in the market valuations of other restaurant companies;
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actions by stockholders;
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various market factors or perceived market factors, including rumors, involving us, our suppliers and distributors, whether accurate or not;
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announcements by us or our competitors of new locations, menu items, technological advances, significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives;
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the addition or loss of a key member of management; and
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changes in the costs or availability of key inputs to our operations.
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In addition, we cannot assure that an
active trading market for our common stock will continue which could affect our stock price and the liquidity of any investment in our common stock.
The
trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business and our industry. If one or more analysts adversely change their recommendation regarding our shares or
our competitors stock, our share price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets which, in turn, could cause our share price
or trading volume to decline.
In addition, our stock price can be influenced by trading activity in our common stock or trading activity in derivative
instruments with respect to our common stock as a result of market commentary (including commentary that may be unreliable or incomplete in some cases); changes in expectations about our business, our creditworthiness or investor confidence
generally; actions by shareholders and others seeking to influence our business strategies; portfolio transactions in our stock by significant shareholders; or trading activity that results from the ordinary course rebalancing of stock indices in
which our stock may be included.
In the past, following periods of volatility in the market price of a companys securities, shareholders have often
instituted securities class action litigation against those companies. Such litigation, if instituted, could result in substantial costs and a diversion of management attention and resources, which would significantly harm our profitability and
reputation.
We currently do not pay any dividends to our shareholders and they do not receive any return on their investment unless they sell their
common stock for a price greater than that what they paid for it.
The continued operation and expansion of our business will require substantial
funding. Accordingly, we currently do not pay any dividends to our shareholders and they do not receive any portion of their current total return on investment from this type of capital allocation. Therefore, our shareholders may have to sell some
or all of their common stock in order to generate cash flow from their investment. Our shareholders may not receive a gain on their investment when they sell our common stock and they may lose some or the entire amount of their investment. Any
determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results, contractual restrictions, restrictions imposed by applicable law and other factors our
Board of Directors deems relevant.
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Failure to establish, maintain and apply adequate internal control over our financial reporting could
affect our reported results of operations.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley
Act of 2002 and the related rules adopted by the SEC and the Public Company Accounting Oversight Board. These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to
provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute
assurance that a misstatement of our financial statements would be prevented or detected. Should we identify a material weakness in internal controls, there can be no assurance that we will be able to remediate the material weaknesses identified in
a timely manner or maintain all of the controls necessary to remain in compliance. Any failure to maintain an effective system of internal controls over financial reporting could limit our ability to report our financial results accurately and
timely or to detect and prevent fraud. Any such failure could subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, or cause a breach of certain covenants under our
financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could
suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in the price of our common stock.
Our operations, including our loyalty and employee engagement programs, are heavily dependent on information technology. Any material failure of
such technology, including but not limited to cyber-attacks, could adversely affect our revenues and impair our ability to efficiently operate our business.
We rely heavily on electronic information systems in all aspects of our operations, including (but not limited to)
point-of-sale
transaction processing in our restaurants; efficient operation of our restaurant kitchens; management of our inventories and overall supply chain; collection of cash; payment of payroll and
other obligations; and, various other processes and procedures including our customer loyalty and employee engagement programs. Our ability to efficiently manage our business depends significantly on the reliability and capacity of our
in-house
information systems and those technology services and systems that we contract for from third parties. Our electronic information systems, including our
back-up
systems, are subject to damage or interruption from power outages, cyber-attacks, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and
hurricanes, and/or errors by our employees. The failure of any of these systems to operate effectively, any problems with their maintenance, any issues with upgrades or transitions to replacement systems, or any breaches in data security could cause
material interruptions to our operations or harm to individuals in the form of identity theft or improper use of personal information. While we have invested and continue to invest in technology security initiatives and disaster recovery plans,
these measures cannot fully insulate us from technology disruption that could result in adverse effects on operations and profits. Although we, with the help of third party service providers and consultants, intend to maintain and upgrade our
security technology and establish operational procedures to prevent such damage, breaches, or attacks, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the
field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third party service providers use to encrypt and protect customer transaction data. A failure of such security measures could harm
our reputation and financial results, as well as subject us to litigation or actions by regulatory authorities. Significant capital investments might be required to remediate any problems, infringements, misappropriations or other third party
claims.
We outsource certain essential technology-based business processes to third party vendors that subject us to risks, including disruptions
in business, increased costs and risk of data breaches or privacy law compliance issues.
Some of our essential business processes that are
dependent on technology are outsourced to third parties. Such processes include, but are not limited to, gift card tracking and authorization,
on-line
ordering, credit card authorization and processing,
certain components of our BJs Premier Rewards customer loyalty program, certain insurance claims processing, payroll processing, web site hosting and maintenance, data warehousing and business intelligence services,
point-of-sale
system maintenance, certain tax filings, telecommunications services,
web-based
labor scheduling and
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other key processes. We make a diligent effort to ensure that all providers of outsourced services are observing proper internal control practices, such as redundant processing facilities;
however, there are no guarantees that failures will not occur. If the security and information systems that our outsourced third party providers use to store or process such information are compromised or if such third parties otherwise fail to
comply with applicable privacy laws and regulations, we could face litigation and the imposition of penalties that could adversely affect our financial performance. Our reputation as a brand or as an employer could also be adversely affected from
these types of security breaches or regulatory violations, which could impair our sales or ability to attract and keep qualified employees.
We may
incur costs resulting from security risks we face in connection with our electronic processing and transmission of confidential customer information.
We accept electronic payment cards from our customers for payment in our restaurants. A number of restaurant operators and retailers have experienced actual
or potential security breaches in which credit and debit card information may have been stolen in addition to other personal information such as our customers names, email addresses, home addresses and phone numbers. While we have taken
reasonable steps to prevent the occurrence of security breaches in this respect, we may, in the future, become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information,
and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit or debit card information may be brought by payment card providers, banks and credit unions that
issue cards, cardholders (either individually or as part of a class action lawsuit) and federal and state regulators. Any such proceedings could distract our management from running our business and cause us to incur significant unplanned losses and
expenses. Additionally, any publicity related to stolen personal identification from credit and debit card information or other personal information such as our customers or employee names, email addresses, home addresses and phone numbers may
negatively affect our sales and profitability. We also receive and maintain certain personal information about our customers and employees. The use of this information by us is regulated at the federal and state levels. If our security and
information systems are compromised or our employees fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as results of
operations, and could result in litigation against us or the imposition of penalties. In addition, our ability to accept credit cards as payment in our restaurants and
on-line
store depends on us remaining in
compliance with standards set by the PCI Security Standards Council. These standards, set by a consortium of the major credit card companies, require certain levels of system security and procedures to protect our customers credit card and
other personal information. Privacy and information security laws and regulations change over time, and compliance with those changes may result in cost increases due to necessary systems and process changes.
Our federal, state and local tax returns may, from time to time, be selected for audit by the taxing authorities, which may result in tax assessments or
penalties that could have a material adverse impact on our results of operations and financial position.
We are subject to federal, state and
local taxes. Significant judgment is required in determining the provision for income taxes. Although we believe our tax estimates are reasonable, if the IRS or other taxing authority disagrees with the positions we have taken on our tax returns, we
could have additional tax liability, including interest and penalties. If material, payment of such additional amounts, upon final adjudication of any disputes, could have a material impact on our results of operations and financial position. The
cost of complying with new tax rules, laws or regulations could be significant. Increases in federal or state statutory tax rates and other changes in tax laws, rules or regulations may increase our effective tax rate. Any increase in our effective
tax rate could have a material impact on our financial results.
Unsolicited takeover proposals, governance change proposals, proxy contests and
certain proposals/actions by activist investors may create additional risks and uncertainties with respect to the Companys financial position, operations, strategies and management, and may adversely affect our ability to attract and retain
key employees. Any perceived uncertainties may affect the market price and volatility of our securities.
Public companies in the restaurant
industry have been the target of unsolicited takeover proposals in the past. In the event that a third party, such as a competitor, private equity firm or activist investor makes an unsolicited takeover proposal, or proposes to change our governance
policies or board of directors, or makes other proposals concerning the
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Companys ownership structure or operations, our review and consideration of such proposals may be a significant distraction for our management and employees, and could require us to expend
significant time and resources.
Such proposals may create uncertainty for our employees additional risks and uncertainties with respect to the Companys financial position, operations, strategies and management, and may
adversely affect our ability to attract and retain key employees. Any perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.
Any suspension of, or failure to repurchase the Companys stock up to the maximum amounts permitted under, our previously announced repurchase
program may negatively impact investor perception of us, and could therefore affect the market price and volatility of our stock.
Our stock
repurchase program may require us to use a significant portion of our cash flow from operations and/or may require us to incur indebtedness utilizing our existing Credit Facility or some other form of debt financing. Our ability to repurchase stock
will depend on our ability to generate sufficient cash flows from operations, as supplemented by proceeds from the exercise of employee stock options and our capacity to borrow funds, which may be subject to economic, financial, competitive and
other factors that are beyond our control. The inability to complete stock repurchases under our previously announced repurchase program may negatively impact investor perception of us, and could therefore affect the market price and volatility of
our stock.