Description
Summary
Casual diner BJ’s Restaurants (BJRI) is a five-bagger off March lows incl more than doubling in last two months to pre-CV >$900M EV despite SSS recovery that lags peers and relatively benign positioning. Investors appear to be underwriting a rapid recovery to prior 2019 peak that appears overly optimistic. Specifically, a more volatile, extended recovery appears likely given sub-optimal business (relatively over-indexed to bar and late night) and geographic (30% CA) mix. And any potential longer-term share gains from indy restaurant closures may be offset by challenges from stickiness of recent consumer behavior shifts toward convenience, off-premise and at-home dining and lower overall levels of spending. Combo of fully recovered EV, elevated expectations for linear fund’l recovery, unprecedented uncertainty and history of mean-reversion after under- and over-shooting fund’ls makes for an attractive short-side setup.
Thesis
BJRI appears asymmetric to downside as rapid return to prior-peak financials embedded in current share price (consensus expectations lag) appears unrealistic even after acknowledging unprecedented uncertainty/lack of visibility that supports unusually wide range of potential outcomes. Thesis suggests more volatile, extended recovery especially given outsized CA exposure with Street over-estimating trajectory of SSS improvement and sustainability of recent margin gains while under-estimating potential impact of consumer behavior shifts and spending uncertainty incl recent emergence of pattern below 2019 levels. Stock currently trades at 50x 2021 consensus or 17x prior-peak EPS. Reversion to even top end of trailing 3-yr NTM P/E range or 34x on any fund’l disappointment and/or reversal in flows would put stock back at $26/share.
Catalysts
Catalysts include 1/ SSS recovery takes on “W” shape post-CA indoor dining re-openings on some combo of CV-19 resurgence, reduced outdoor dining capacity on colder weather and/or macro/election uncertainty; 2/ recent off-premise shift-driven margin gains prove transitory; and/or 3/ reversal of flows from recent negative momentum/re-opening trade.
Risks
Risks include 1/ acceleration in SSS recovery on rapid resumption to pre-CV consumer behavior (widespread vaccine adoption and economic stability pre-requisites); 2/ margin upside on stickier than expected CV learnings; 3/ investors’ willingness to extend duration on any fund’l disappointment owing to zero interest rates and R Shaich involvement as part of narrative; and/or 4/ sustained elevated valuation on cont’d favorable flows from negative-momentum/re-opening factor trade.
There was an attractive albeit relatively short-lived opp’y to own the casual dining space which were initially among the hardest-hit names among the CV casualty group. Combo of an initial linear SSS recovery phase off deep March lows through June in part driven by rapid pivot to off-premise and heavy cost cuts translated into very favorable 2Q earnings cycle relative to overly pessimistic expectations. Subsequent extrapolation and more recent favorable flows from re-opening optimism have swung the pendulum too far in the opposite direction. Liquidity appears adequate following $70M private placement in May with T Rowe and Ron Shaich’s Act III (3.5M common shares plus 875K warrants w $27 strike).
Catalysts
Visibility improves that SSS recovery won’t be linear
CV pivot margin gains prove transitory
Flows from recent negative momentum/re-opening trade reverse
Risks
Expected acceleration in SSS recovery occurs on rapid resumption to pre-CV consumer behavior
Non-fund’l dynamics sustain elevated valuation metrics
Duration gets extended on zero-rates argument
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I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Visibility improves that SSS recovery won’t be linear
CV pivot margin gains prove transitory
Flows from recent negative momentum/re-opening trade reverse