BJs RESTAURANTS INC: Form 10-Q for the period ended Oct 3, 2023

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

Certain information included in this Form 10-Q and other filings with the Securities and Exchange Commission, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers may contain “forward-looking” statements about our current and expected performance trends, growth plans, business goals and other matters. Words or phrases such as “believe,” “plan,” “will likely result,” “expect,” “intend,” “will continue,” “is anticipated,” “estimate,” “project,” “may,” “could,” “would,” “should,” and similar expressions are intended to identify “forward-looking” statements. These statements, and any other statements that are not historical facts, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended from time to time. The cautionary statements made in this Form 10-Q should be read as being applicable to all related “forward-looking” statements wherever they appear in this Form 10-Q. These forward-looking statements are based on information available to us as of the date any such statements are made, and we assume no obligation to update these forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include, but are not limited to, the risk factors described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 3, 2023, as updated in our Form 10-Q for the thirty-nine weeks ended October 3, 2023, and in other reports filed subsequently with the SEC.

GENERAL

BJ’s Restaurants is a leading casual dining restaurant brand differentiated by a high-quality, varied menu with compelling value, and a dining experience that offers our customers (referred to as “guests”) best-in-class service, hospitality and enjoyment, in a high-energy, welcoming and approachable atmosphere. BJ’s is a national restaurant chain that, as of November 6, 2023, owns and operates 217 restaurants located in 30 states.

The first BJ’s restaurant opened in 1978 in Orange County, California, and was a small sit-down pizzeria that featured Chicago style deep-dish pizza with a unique California twist. In 1996, we introduced our proprietary craft beers and expanded the BJ’s concept to a full-service, high-energy casual dining restaurant when we opened our first large format restaurant with an on-site brewing operation in Brea, California. Today our restaurants feature a broad menu with approximately 100 menu items designed to offer something for everyone including: slow roasted entrees such as prime rib, EnLIGHTened Entrees® such as our Cherry Chipotle Glazed Salmon, our original signature deep-dish pizza, the world-famous Pizookie® dessert, and our award-winning BJ’s craft beers. Our craft beer is produced at four in-restaurant brewing facilities, our Texas brewpub locations and by independent third-party brewers using our proprietary recipes.

Our revenues are comprised of food and beverage sales from our restaurants, including takeout, delivery and catering sales. Revenues from restaurant sales are recognized when payment is tendered. Amounts paid with a credit card are recorded in accounts and other receivables until payment is collected from the credit card processor. We sell gift cards which do not have an expiration date, and we do not deduct non-usage fees from outstanding gift card balances. Gift card sales are recorded as a liability and recognized as revenues upon redemption in our restaurants. Based on historical redemption rates, a portion of our gift card sales are not expected to be redeemed and will be recognized as gift card “breakage.” Estimated gift card breakage is recorded as revenue and recognized in proportion to our historical redemption pattern, unless there is a legal obligation to remit the unredeemed gift cards to government authorities.

Our guest loyalty program enables participants to earn points for qualifying purchases that can be redeemed for food and beverages in the future. We allocate the transaction price between the goods delivered and the future goods that will be delivered, on a relative standalone selling price basis, and defer the revenues allocated to the points until such points are redeemed.

All of our restaurants are Company-owned. In calculating comparable restaurant sales, we include a restaurant in the comparable base once it has been open for 18 months. Guest traffic for our restaurants is estimated based on the number of guest checks.

Cost of sales is comprised of food and beverage costs, including the cost to produce and distribute our proprietary craft beer, soda and ciders. The components of cost of sales are variable and typically fluctuate directly with sales volumes but also may be impacted by changes in commodity prices, a shift in sales mix to higher cost proteins or other higher cost items, or varying levels of promotional activities.

Labor and benefit costs include direct hourly and management wages, bonuses, payroll taxes, fringe benefits and stock-based compensation, and workers’ compensation expense that are directly related to restaurant level team members.

Occupancy and operating expenses include restaurant supplies, credit card fees, third-party delivery company commissions, marketing costs, fixed rent, percentage rent, common area maintenance charges, utilities, real estate taxes, repairs and maintenance and other related restaurant costs.

General and administrative expenses include costs for our corporate administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components of this category include corporate management, field supervision and corporate hourly staff salaries and related team member benefits (including stock-based compensation expense and cash-based incentive compensation), travel and relocation costs, information systems, the cost to recruit and train new restaurant management team members, corporate rent, certain brand marketing-related expenses and legal and consulting fees.

Depreciation and amortization are composed primarily of depreciation of capital expenditures for restaurant and brewing equipment and leasehold improvements.

Restaurant opening expenses, which are expensed as incurred, consist of the costs of hiring and training the initial hourly work force for each new restaurant, travel, the cost of food and supplies used in training, grand opening promotional costs, the cost of the initial stock of operating supplies and other direct costs related to the opening of a restaurant, including rent during the construction and in-restaurant training period.

RESULTS OF OPERATIONS

The following table provides, for the periods indicated, our unaudited Consolidated Statements of Operations expressed as percentages of total revenues. The results of operations for the thirteen and thirty-nine weeks ended October 3, 2023 and September 27, 2022, are not necessarily indicative of the results to be expected for the full fiscal year. Percentages below may not reconcile due to rounding.

Thirteen Weeks Ended October 3, 2023 Compared to Thirteen Weeks Ended September 27, 2022

Revenues. Total revenues increased by $7.3 million, or 2.3%, to $318.6 million during the thirteen weeks ended October 3, 2023, from $311.3 million during the comparable thirteen-week period of 2022. The increase in revenues primarily consisted of a 0.4%, or $1.2 million, increase in comparable restaurant sales, and a $9.0 million increase in sales from new restaurants not yet in our comparable restaurant sales base. Revenue increases were offset primarily by a $3.5 million decrease related to closed restaurants. The increase in comparable restaurant sales was the result of an increase in average check of approximately 4.7%, due to menu price increases coupled with changes in mix, offset by a decrease in guest traffic of approximately 4.3%.

Cost of Sales. Cost of sales decreased by $2.4 million, or 2.8%, to $82.7 million during the thirteen weeks ended October 3, 2023, from $85.0 million during the comparable thirteen-week period of 2022. This was primarily due to lower commodity costs and savings from our cost savings initiatives, offset by the increase in revenue and associated costs related to new restaurants opened since the thirteen weeks ended September 27, 2022. As a percentage of revenues, cost of sales decreased to 25.9% for the current thirteen-week period from 27.3% for the prior year comparable period. This decrease was primarily due to easing of inflationary pressure on food costs, coupled with increased revenues from menu price increases and the effectiveness of our cost savings initiatives.

Labor and Benefits. Labor and benefit costs for our restaurants increased by $0.7 million, or 0.6%, to $118.2 million during the thirteen weeks ended October 3, 2023, from $117.5 million during the comparable thirteen-week period of 2022. This was primarily due to labor cost inflation, mitigated in part by greater labor efficiencies. As a percentage of revenues, labor and benefit costs decreased to 37.1% for the current thirteen-week period from 37.7% for the prior year comparable period. This decrease was primarily due to our ability to leverage certain fixed costs over a higher revenue base and improved labor efficiency, coupled with the effectiveness of our cost savings initiatives. Included in labor and benefits for the thirteen weeks ended October 3, 2023 and September 27, 2022, was approximately $0.6 million and $0.7 million, respectively, or 0.2% of revenues of stock-based compensation expense, related to equity awards granted in accordance with our Gold Standard Stock Ownership Program for certain restaurant management team members.

Occupancy and Operating. Occupancy and operating expenses increased by $3.1 million, or 4.0%, to $80.0 million during the thirteen weeks ended October 3, 2023, from $76.9 million during the comparable thirteen-week period of 2022. This was primarily due to increases of $1.2 million in third-party delivery company fees and expenses, $1.0 million in rent-related expenses, and $0.7 million related to restaurant facilities expenses. As a percentage of revenues, occupancy and operating expenses increased to 25.1% for the current thirteen-week period from 24.7% for the prior year comparable period. This increase was primarily related to increased delivery fees and expenses in an effort to drive off premise sales, including catering.

General and Administrative. General and administrative expenses increased by $0.6 million, or 3.1%, to $19.5 million during the thirteen weeks ended October 3, 2023, from $18.9 million during the comparable thirteen-week period of 2022. This was primarily due to increased personnel costs, including a $0.4 million decrease related to our deferred compensation liability. Included in general and administrative costs for the thirteen weeks ended October 3, 2023 and September 27, 2022, was approximately $2.1 million and $2.0 million, or 0.7% and 0.6% of revenues, respectively, of stock-based compensation expense. As a percentage of revenues, general and administrative expenses remained consistent at 6.1% for the current thirteen-week period and the prior year comparable period.

Depreciation and Amortization. Depreciation and amortization increased by $0.5 million, or 3.0%, to $17.9 million during the thirteen weeks ended October 3, 2023, compared to $17.4 million during the comparable thirteen-week period of 2022. This increase was primarily related to depreciation expense related to our restaurants opened since the thirteen weeks ended September 27, 2022, partially offset by the impact of impairment and disposal charges taken in the prior year, and the closure of five restaurants since the thirteen weeks ended September 27, 2022. As a percentage of revenues, depreciation and amortization remained consistent at 5.6% for the current thirteen-week period and the prior year comparable period.

Restaurant Opening. Restaurant opening expense increased by $0.9 million, or 186.1%, to $1.4 million during the thirteen weeks ended October 3, 2023, compared to $0.5 million during the comparable thirteen-week period of 2022. This increase was primarily due to the number and timing of openings.

Loss on Disposal and Impairment of Assets, Net. Loss on disposal and impairment of assets, net, was $1.4 million during the thirteen weeks ended October 3, 2023, and $0.4 million during the comparable thirteen-week period of 2022. For the thirteen weeks ended October 3, 2023, these costs primarily relate to disposals of assets in conjunction with initiatives to keep our restaurants up to date as well as the closure of an under-performing restaurant in the quarter.

Interest Expense, Net. Interest expense, net, increased by $0.4 million to $1.0 million during the thirteen weeks ended October 3, 2023, compared to $0.6 million during the comparable thirteen-week period of 2022. This increase was primarily due to the increase in weighted average interest rate year over year, coupled with a slightly higher average outstanding debt balance.

Income Tax Expense (Benefit). Our effective income tax rate for the thirteen weeks ended October 3, 2023, reflected a 11.8% tax expense compared to a 71.5% tax benefit for the comparable thirteen-week period of 2022. The effective tax rate for the thirteen weeks ended October 3, 2023 and September 27, 2022 was different than the statutory rate primarily due to FICA tax tip credits.

Thirty-Nine Weeks Ended October 3, 2023 Compared to Thirty-Nine-Weeks Ended September 27, 2022

Revenues. Total revenues increased by $69.8 million, or 7.4%, to $1.0 billion during the thirty-nine weeks ended October 3, 2023, from $939.8 million during the comparable thirty-nine week period of 2022. The increase in revenues primarily consisted of a 4.7%, or $43.1 million, increase in comparable restaurant sales, a $31.5 million increase in sales from new restaurants not yet in our comparable restaurant sales base, and a $2.2 million increase related to the shift in weeks as a result of the 53rd week in fiscal 2022. Revenue increases were offset primarily by a $6.0 million decrease related to closed restaurants. The increase in comparable restaurant sales was the result of an increase in average check of approximately 6.4%, due to menu price increases coupled with changes in mix, offset by a decrease in guest traffic of approximately 1.7%.

Cost of Sales. Cost of sales increased by $6.7 million, or 2.6%, to $264.1 million during the thirty-nine weeks ended October 3, 2023, from $257.4 million during the comparable thirty-nine week period of 2022. This increase was primarily due to costs of sales for our seven new restaurants opened since the thirty-nine weeks ended September 27, 2022, partially offset by the closure of five restaurants since the thirty-nine weeks ended September 27, 2022. As a percentage of revenues, cost of sales decreased to 26.2% for the current thirty-nine week period from 27.4% for the prior year comparable period. This decrease was primarily due to easing of inflationary pressure on food costs, coupled with increased revenues from menu price increases and cost savings benefits resulting from our cost savings initiatives.

Labor and Benefits. Labor and benefit costs for our restaurants increased by $16.2 million, or 4.5%, to $373.1 million during the thirty-nine weeks ended October 3, 2023, from $356.9 million during the comparable thirty-nine week period of 2022. This was primarily due to $8.2 million related to higher hourly labor, $4.3 million related to higher management labor and incentive compensation, and $2.4 million related to taxes and benefits as a result of increases in hourly wage rates and the additional labor related to our five new restaurants opened since the thirty-nine weeks ended September 27, 2022. As a percentage of revenues, labor and benefit costs decreased to 37.0% for the current thirty-nine week period from 38.0% for the prior year comparable period. This decrease was primarily due to our ability to leverage certain fixed costs over a higher revenue base, improved labor efficiency, better team member retention, and the effectiveness of our cost savings initiatives. Included in labor and benefits for the thirty-nine weeks ended October 3, 2023 and September 27, 2022, was approximately $1.9 million and $2.0 million, respectively, or 0.2% revenues, of stock-based compensation expense related to equity awards granted in accordance with our Gold Standard Stock Ownership Program for certain restaurant management team members.

Occupancy and Operating. Occupancy and operating expenses increased by $15.9 million, or 7.1%, to $241.1 million during the thirty-nine weeks ended October 3, 2023, from $225.2 million during the comparable thirty-nine week period of 2022. This was primarily due to increases of $3.8 million in rent-related expenses, $3.7 million related to restaurant facilities expenses, $2.7 million in third-party delivery company fees and expenses, $1.9 million in utilities, $1.5 million in marketing expenditures, and $1.8 million in merchant credit card fees, offset by a decrease of $0.6 million in supplies. As a percentage of revenues, occupancy and operating expenses decreased to 23.9% for the current thirty-nine week period from 24.0% for the prior year comparable period. This decrease was primarily related to our ability to leverage certain fixed operating and occupancy costs over a higher revenue base.

General and Administrative. General and administrative expenses increased by $6.3 million, or 11.7%, to $60.4 million during the thirty-nine weeks ended October 3, 2023, from $54.0 million during the comparable thirty-nine week period of 2022. This was primarily due to increases of $5.6 million in personnel costs, including a $2.5 million increase related to our deferred compensation liability, and a $1.0 million increase in corporate expenses, offset by decreases of $0.3 million in rent related expenses, and $0.2 million in recruiting related expenses. Included in general and administrative costs for the thirty-nine weeks ended October 3, 2023 and September 27, 2022, was approximately $6.2 million and $5.6 million, or 0.6% of revenues, of stock-based compensation expense. As a percentage of revenues, general and administrative expenses increased to 6.0% for the current thirty-nine week period from 5.8% for the prior year comparable period. This increase was primarily related to our increased deferred compensation liability.

Depreciation and Amortization. Depreciation and amortization increased by $0.3 million, or 0.6%, to $53.2 million during the thirty-nine weeks ended October 3, 2023, compared to $52.9 million during the comparable thirty-nine week period of 2022. This increase in depreciation and amortization is related to our restaurants opened since the thirty-nine weeks ended September 27, 2022. This increase was offset by the decrease in depreciation and amortization related to impairment and disposal charges taken in the prior year, including the impairment and reduction of carrying value for the closure of five restaurants since the thirty-nine weeks ended September 27, 2022. As a percentage of revenues, depreciation and amortization decreased to 5.3% for the current thirty-nine week period from 5.6% for the prior year comparable period. This decrease was primarily due to a higher revenue base.

Restaurant Opening. Restaurant opening expense increased by $0.5 million, or 23.3%, to $2.6 million during the thirty-nine weeks ended October 3, 2023, compared to $2.1 million during the comparable thirty-nine week period of 2022. This increase was primarily due to the number and timing of openings.

Loss on Disposal and Impairment of Assets, Net. Loss on disposal and impairment of assets, net, was $4.7 million during the thirty-nine weeks ended October 3, 2023, and $1.0 million during the comparable thirty-nine week period of 2022. For the thirty-nine weeks ended October 3, 2023, these costs primarily relate to disposals of assets in conjunction with initiatives to keep our restaurants up to date, including our restaurant remodel initiative and the removal of glass partitions in our dining rooms that were installed during the pandemic, as well as the closure of four under-performing restaurants.

Interest Expense, Net. Interest expense, net, increased by $1.5 million to $3.2 million during the thirty-nine weeks ended October 3, 2023, compared to $1.7 million during the comparable thirty-nine week period of 2022. This increase was primarily due to the increase in our weighted average interest rate year over year, coupled with a slightly higher average outstanding debt balance.

Other (Expense) Income, Net. Other income (expense), net, was $0.8 million of income during the thirty-nine weeks ended October 3, 2023, compared to $0.5 million of expense during the comparable thirty-nine week period of 2022. This change was primarily related to gains associated with the cash surrender value of certain life insurance policies under our deferred compensation plan.

Income Tax Expense (Benefit). Our effective income tax rate for the thirty-nine weeks ended October 3, 2023, reflected a 44.9% tax benefit compared to a 101.0% tax benefit for the comparable thirty-nine week period of 2022. The effective tax rate benefit for the thirty-nine weeks ended October 3, 2023 and September 27, 2022 was different than the statutory rate primarily due to significant FICA tax tip credits.

LIQUIDITY AND MATERIAL CASH REQUIREMENTS

The following table provides, for the periods indicated, a summary of our key liquidity measurements (dollars in thousands):

We focus on cash flow generation and maintaining a solid and flexible financial position to execute our long-term strategy of investing in our business and opening new restaurants. We continue to monitor the macro environment and will review and, when appropriate, adjust our overall approach to capital allocation, including share repurchases and dividends, as the environment changes.

Based on current operations, we believe that our current cash and cash equivalents, coupled with cash generated from operations and availability under our credit agreement will be adequate to meet our capital expenditure and working capital needs for at least the next twelve months. Our future operating performance will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Similar to many restaurant chains, we typically utilize operating lease arrangements (principally ground leases) for the our restaurant locations. We believe our operating lease arrangements provide appropriate leverage for our capital structure in a financially efficient manner. However, we are not limited to the use of lease arrangements as our only method of opening new restaurants and from time to time have purchased the underlying land for new restaurants. We typically lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements. Our rent structures vary from lease to lease, but generally provide for the payment of both minimum and contingent (percentage) rent based on sales, as well as other expenses related to the leases (for example, our pro-rata share of common area maintenance, property tax and insurance expenses). Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. There can be no assurance that such allowances will be available to us on each project. From time to time, we may also decide to purchase the underlying land for a new restaurant if that is the only way to secure a highly desirable site. Currently, we own the underlying land for our Texas brewpub locations. We also own parcels of land adjacent to two of our restaurants. It is not our current strategy to own a large number of land parcels that underlie our restaurants. Therefore, in many cases we have subsequently entered into sale-leaseback arrangements for land parcels that we previously purchased. We disburse cash for certain site-related work, buildings, leasehold improvements, furnishings, fixtures and equipment to build our leased and owned premises. We own substantially all of the equipment, furniture and trade fixtures in our restaurants and currently plan to do so in the future.

CASH FLOWS

The following tables set forth, for the periods indicated, our cash flows from operating, investing, and financing activities (in thousands):

Operating Cash Flows

Net cash provided by operating activities was $73.6 million during the thirty-nine weeks ended October 3, 2023, representing a $39.8 million increase from the $33.8 million provided by during the thirty-nine weeks ended September 27, 2022. The increase over the prior year is primarily due to improved net income, the timing of payments for accrued expenses and the change in deferred income taxes.

Investing Cash Flows

Net cash used in investing activities was $82.0 million during the thirty-nine weeks ended October 3, 2023, representing a $31.7 million increase from the $50.3 million used during the thirty-nine weeks ended September 27, 2022. The increase over prior year is primarily due to the timing of new restaurants opened, as well as restaurants under construction, and an increase in restaurant remodel activity.

The following table provides, for the periods indicated, the components of capital expenditures (in thousands):

Year to date as of November 6, 2023, we have opened five new restaurants and closed four restaurants. We currently plan to open four to six restaurants in fiscal 2024, and we have entered into signed leases, land purchase agreements or letters of intent for all of our 2024 new restaurant locations.

We currently anticipate our total capital expenditures for fiscal 2023 to be approximately $95 million. This estimate includes the cost of the five new restaurants that have been opened and the cost to remodel 35 to 40 existing locations, coupled with certain capital expenditures for restaurants that will open next year. Total capital expenditures exclude anticipated proceeds from tenant improvement allowances. We expect to fund our net capital expenditures with our current cash balance on hand, cash flows from operations and our line of credit. Our future cash requirements will depend on many factors, including the pace of our expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords.

Financing Cash Flows

Net cash used in financing activities was $4.6 million during the thirty-nine weeks ended October 3, 2023, representing a $1.7 million increase from the $2.8 million used during the thirty-nine weeks ended September 27, 2022. This increase was primarily due to an increase in common stock repurchases.

OFF-BALANCE SHEET ARRANGEMENTS

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities (“VIEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow limited purposes. As of October 3, 2023, we are not involved in any off-balance sheet arrangements.

IMPACT OF INFLATION

Heightened inflation has had a material impact on our operations, new restaurant construction and corresponding return on invested capital. While we have been able to partially offset inflation and other changes in the costs of key operating inputs by gradually increasing menu prices, coupled with cost savings initiatives, more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. Increases in inflation could have a severe impact on the United States and global economies, which will have an adverse impact on our business, financial condition and results of operations. From time to time, competitive conditions will limit our menu pricing flexibility. In addition, macroeconomic conditions that impact consumer discretionary spending for food away from home could make additional menu price increases imprudent. There can be no assurance that all of our future cost increases can be offset by higher menu prices or that higher menu prices will be accepted by our restaurant guests without any resulting changes in their visit frequencies or purchasing patterns. Many of the leases for our restaurants provide for contingent rent obligations based on a percentage of sales. As a result, rent expense will absorb a proportionate share of any menu price increases in our restaurants. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.

SEASONALITY AND ADVERSE WEATHER

Our business is impacted by weather and other seasonal factors that typically impact other restaurant operations. Holidays (and shifts in the holiday calendar) and severe weather including hurricanes, tornados, thunderstorms, snow and ice storms, prolonged extreme temperatures and similar conditions may impact restaurant sales volumes in some of the markets where we operate. Many of our restaurants are located in or near shopping centers and malls that typically experience seasonal fluctuations in sales. Quarterly results have been and will continue to be significantly impacted by the timing of new restaurant openings and their associated restaurant opening expenses. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses in the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. We continually review the estimates and underlying assumptions to ensure they are appropriate for the circumstances. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates.

A summary of our other critical accounting policies is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 3, 2023. During the thirty-nine weeks ended October 3, 2023, there were no significant changes in our critical accounting policies.

The following discussion of market risks contains “forward-looking” statements. Actual results may differ materially from the following discussion based on general conditions in the financial and commodity markets.

Interest Rate Risk

We have a $215 million Credit Facility, of which $60.0 million is currently outstanding and carries interest at a floating rate. We utilize the Credit Facility principally for letters of credit that are required to support our self-insurance programs, to fund a portion of our announced share repurchase program, and for working capital and construction requirements, as needed. We are exposed to interest rate risk through fluctuations in interest rates on our obligations under the Credit Facility. Based on our current outstanding balance, a hypothetical 1% change in the interest rates under our Credit Facility would have an approximate $0.5 million annual impact on our net income.

Food, Supplies and Commodity Price Risks

We purchase food, supplies and other commodities for use in our operations based upon market prices established with our suppliers. Our business is dependent on frequent and consistent deliveries of these items. We may experience shortages, delays or interruptions due to inclement weather, natural disasters, labor issues or other operational disruptions or other conditions beyond our control such as cyber breaches or ransomware attacks at our suppliers, distributors or transportation providers. Additionally, many of the commodities purchased by us can be subject to volatility due to market supply and demand factors outside of our control, whether contracted for or not. Costs can also fluctuate due to government regulation. To manage this risk in part, we attempt to enter into fixed-price purchase commitments, with terms typically up to one year, for some of our commodity requirements. However, it may not be possible for us to enter into fixed-price contracts for certain commodities or we may choose not to enter into fixed-price contracts for certain commodities. We believe that substantially all of our food and supplies are available from several sources, which helps to diversify our overall commodity cost risk. We also believe that we have some flexibility and ability to increase certain menu prices, or vary certain menu items offered or promoted, in response to food commodity price increases. Some of our commodity purchase arrangements may contain contractual features that limit the price paid by establishing certain price floors or caps. We do not use financial instruments to hedge commodity prices, since our purchase arrangements with suppliers, to the extent that we can enter into such arrangements, help control the ultimate cost that we pay.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934 as amended, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 3, 2023, our disclosure controls and procedures are designed and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our third fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended January 3, 2023.