One of our goals for 1999 was to achieve a 32.5% cost of sales for the year, compared to 34.2% in 1998. Our cost of sales was 31.7% and 32.8% in the first and second quarters, and averaged 32.6% for the year, but shot up to 34.5% for the third quarter. Several factors contributed to this increase, including prices for dairy, poultry and several other items featured in our lower-priced menu offerings that were at the high end of their expected cost range. We had intended to implement significant menu changes in the early summer, but our sales softened toward the end of the second quarter. We became concerned that the intended changes might exacerbate any negative sales momentum, and we consequently deferred them until later in the third quarter. My fears may have been misplaced, because those menu changes do not appear to have had any negative impact on sales – our fourth quarter sales were simply excellent. In any event, our cost of sales in the third quarter was much higher than anticipated, resulting in lower restaurant operating income, which coupled with higher general and administrative expenses (discussed later) resulted in an operating loss for the third quarter.
Toward the end of the third quarter, we initiated the final steps of several programs (including those menu changes) designed to separate us more clearly from lower-quality casual dining restaurants and to fortify our position as a quality and service leader in the industry. These programs had an immediate positive impact. We posted a very strong same store sales increase, over 8 percent, for the fourth quarter, with restaurant operating profits more than doubling from the third quarter (and improving 31 percent over the fourth quarter of 1998). Cost of sales in the fourth quarter dropped to 31.5 percent, and fully loaded labor (including benefits) was 32.3 percent of sales, down from 34.1 percent in the third quarter. Because of the higher sales volumes achieved, operating expenses as a percentage of sales declined in the fourth quarter and restaurant operating profits improved from approximately 8 percent of sales in the third quarter to 14.8 percent in the fourth quarter. General and administrative expenses, as a percentage of sales, declined in the fourth quarter from the third quarter and operating profits were over 4 percent of sales for the fourth quarter.
One of our goals for 1999 was to achieve a 32.5% cost of sales for the year, compared to 34.2% in 1998. Our cost of sales was 31.7% and 32.8% in the first and second quarters, and averaged 32.6% for the year, but shot up to 34.5% for the third quarter. Several factors contributed to this increase, including prices for dairy, poultry and several other items featured in our lower-priced menu offerings that were at the high end of their expected cost range. We had intended to implement significant menu changes in the early summer, but our sales softened toward the end of the second quarter. We became concerned that the intended changes might exacerbate any negative sales momentum, and we consequently deferred them until later in the third quarter. My fears may have been misplaced, because those menu changes do not appear to have had any negative impact on sales – our fourth quarter sales were simply excellent. In any event, our cost of sales in the third quarter was much higher than anticipated, resulting in lower restaurant operating income, which coupled with higher general and administrative expenses (discussed later) resulted in an operating loss for the third quarter.
| "It is a continuing challenge to reduce our training and recruiting costs. The available pool of highly motivated, quality-oriented manage-ment candidates falls far below industry demand, and we are dedicated to getting more than our fair share of that pool." |
Toward the end of the third quarter, we initiated the final steps of several programs (including those menu changes) designed to separate us more clearly from lower-quality casual dining restaurants and to fortify our position as a quality and service leader in the industry. These programs had an immediate positive impact. We posted a very strong same store sales increase, over 8 percent, for the fourth quarter, with restaurant operating profits more than doubling from the third quarter (and improving 31 percent over the fourth quarter of 1998). Cost of sales in the fourth quarter dropped to 31.5 percent, and fully loaded labor (including benefits) was 32.3 percent of sales, down from 34.1 percent in the third quarter. Because of the higher sales volumes achieved, operating expenses as a percentage of sales declined in the fourth quarter and restaurant operating profits improved from approximately 8 percent of sales in the third quarter to 14.8 percent in the fourth quarter. General and administrative expenses, as a percentage of sales, declined in the fourth quarter from the third quarter and operating profits were over 4 percent of sales for the fourth quarter.
Our weekly sales average for the fourth quarter increased to $79,800 compared to $73,300 in the third quarter. The West Bloomfield opening in Michigan was very successful and, other than approximately $200,000 of its pre-opening costs expensed in the fourth quarter, had only a small negative impact on our results. This is very good for a new restaurant.
Our general and administrative expenses for the year increased from approximately $5.8 million to $7.1 million. This increase reflects several factors, the largest of which was our favorable experience in 1998 under our workers’ compensation program, including some large rebates from the State of Ohio. Our 1998 general and administrative expenses were about $700,000 below normal. We charge all of our management recruiting, training and relocation costs, which amounted to approximately $1.8 million in 1999, to general and administrative expenses. Some companies charge these items “above the line” as restaurant operating expenses, but because our restaurant managers do not have direct control over these costs (and we think it’s quite important to assess how our restaurants are individually managed), we charge these expenses at the corporate level as general and administrative expenses. This has been an area of increasing cost for the Company as we have upgraded our management team by bringing in more qualified, career-oriented people with degrees from colleges with restaurant and hospitality programs. Relocation costs have been very high because of our efforts to get our best people in the right markets.
All other increases in general and administrative expenses were relatively modest. It is a continuing challenge to reduce our training and recruiting costs. The available pool of highly motivated, quality-oriented management candidates falls far below industry demand, and we are dedicated to getting more than our fair share of that pool. We do not have all the answers yet, but we are diligently working on ways to reduce
our turnover and streamline our training programs.
I want to review some of the broader business issues which I discussed in our 1997 Annual Report. In that letter to you, I outlined several issues concerning the structural nature of our business and our actions taken to improve results. I’m not going to bore our longer-term shareholders with a complete review, but I do want to revisit some of my thoughts about our business.
Our restaurants are capable of running very high sales volumes, well in excess of $100,000 per week. However, the same characteristics which enable us to operate efficiently at high volume levels mean that we are likely to generate a large operating loss in a low-volume restaurant. In order to deliver the J. Alexander’s dining experience our payroll and operating expenses are relatively high. Our cost to operate a restaurant at $60,000 per week is not much lower than a $90,000 restaurant.
| "More than ever we are utilizing our outstanding culinary team to make our collection of restau-rants “chef driven.” We use daily menu choices, rotating feature items and special occasion products to align us with high-quality chef-operated restaurants." |
Two charts in our 1997 Annual Report illustrated the impact of sales performance on our income from restaurant operations. To break even in income from restaurant operations, not including any allocation of corporate expenses or interest expense, requires roughly $60,000 of sales per week. Sales in excess of this breakeven point can generate almost exponential returns. On the same train of thought, in our 1997 Annual Report I noted that operating losses at low volume sales levels are significant, because of our high level of fixed costs. Restaurants in some of our smaller markets have taken far too long to generate decent sales levels and in some cases have taken up to three years to generate returns that are acceptable. Consequently, in 1997 we amended our strategy to focus exclusively on larger market areas, and our West Bloomfield, Michigan location, which opened in November 1999, was our first opening under this new strategy.
In our 1997 Annual Report, I asserted that the Company had one really critical issue – sales. Our goal has been to stay focused on ramping up sales in our low volume restaurants and to improve sales performance in the rest. While our sales average was about $72,000 per week in 1997, we must average about $75,000 per week to be profitable and closer to $85,000 per week to post superior results. We are convinced that as long as we execute operations, maintain our quality standards and keep striving for the highest possible service levels in the industry, our sales will continue to grow and we will become increasingly profitable.
I am happy to report that for the first quarter of 2000 our quarterly sales average should exceed $81,000 per week. Our small market units are posting much improved results and all but one are profitable. Our mature restaurant base continues to post large same store sales gains. Our goal has not changed. In two years I hope to be able to report to you that our weekly sales average is more than $90,000. We are utilizing all of our skill sets to drive the business. More than ever we are utilizing our outstanding culinary team to make our collection of restaurants “chef driven.” We use daily menu choices, rotating feature items and special occasion products to align us with high-quality chef-operated restaurants. This positioning has very high sales potential.
The simple fact that we actually have kitchen professionals in our restaurants differentiates us from virtually all large chain-managed casual dining concepts. Most of our real competition comes from locally owned and/or chef-managed independent restaurants. We are convinced that we can be a factor in that restaurant group – in fact, we already are.
All our emphasis on sales focus is designed to achieve one result – solid profitability. We are also taking actions to ensure that our restaurant margins improve while we maintain our high food quality and service standards. I am happy to report to you that these goals are being met in the first quarter of 2000.
The remainder of this letter will update you on the results of initiatives started almost two years ago to strengthen our market position, further differentiate ourselves from the competition in the minds of our guests and leverage the cornerstones of J. Alexander’s – food quality and superior service. I will also share with you how these actions should benefit us in 2000.
| "Outstanding products, like our signature prime rib, 10-ounce filet and New York strip steak are in many cases equal to those served in the higher end of the steakhouse segment, except that for similar quality they charge much higher prices. " |
Our focus at J. Alexander’s since inception has been on quality food and outstanding levels of guest service. Being a quality leader requires
both superior products and a corresponding level of service. Our employees must have both superior product knowledge and high service standards. Provided we successfully execute, our pricing policies should also be able to reflect a superior dining experience compared to our competitors. We want J. Alexander’s to be considered a special place to dine – this is one of our day-to-day goals. We have extremely high levels of repeat business. Our focus is simple: to provide each guest, one at a time, the highest quality food in casual dining, together with a great service experience. In order to achieve this objective, we must first attract and then retain people with a passion for the restaurant industry, people who recognize the critical significance of guest service. We must attract employees who can handle the challenges of working for the best – and we must treat them better than our competitors. We believe that most of our sales growth in the last two years has been the result of improvements in staffing in our restaurants and in the quality of our management team. Our team is getting better, and as it does so, our expectations continue to rise. We believe that our track record of 28 of 30 quarters of same store sales increases since opening our first J. Alexander’s is a direct result of our commitment to superior service. By raising the level of service in our restaurants, while maintaining and even improving our already high food quality, we have been able to improve our competitive positioning. We believe that we offer the equivalent of a white tablecloth dining experience at a large discount to the check average in that segment of the industry. Outstanding products, like our signature prime rib, 10-ounce filet and New York strip steak are in many cases equal to those served in the higher end of the steakhouse segment, except that for similar quality they charge much higher prices. Our Sterling Farms North Atlantic farm-raised salmon is as high-quality a product as you will find on a white tablecloth menu, and ours is offered at a significant discount. We believe that our continued focus on such high-quality products gives us huge competitive flexibility.
During the fourth quarter of 1999, we successfully implemented an Ahi Tuna dinner entree using number one grade, sushi-quality tuna. We also added numerous products to our daily feature program. The 16-ounce bone-in Kansas City strip steak has probably been our most successful daily menu product. We have also featured a New York deli-style turkey sandwich, Cajun ribeye, chicken cordon bleu, porterhouse steak, chicken parmesan and some interesting side dishes, including spaghetti squash with our in-store marinara sauce and braised red cabbage finished with goat cheese and a port wine reduction.
We have a new roasted garlic California Caesar salad, and several other menu enhancements have been made permanent. And of course we vary our menus from market to market in response to local demand.
"During 1999 we consolidated our
menu and eliminated several lower margin items, while also enhancing several offerings. We are always looking for ways to improve the execution of every product we offer." |
The utilization of a daily feature menu has been a key component of our strategy to differentiate our restaurants within the industry. We are able to take advantage of our culinary expertise and our highly trained kitchen staff of professionals to change menu items on a daily basis and offer our guests outstanding fresh seafood selections. Our rotating, all-fresh seafood selection includes grouper, halibut, swordfish, Arctic char, rainbow trout, red snapper, mahimahi, sea bass and tuna, which we offer hickory grilled or Cajun style. Soup selections, fresh vegetables and other interesting daily features are all built around our quality theme.
During 1999 we consolidated our menu and eliminated several lower margin items, while also enhancing several offerings. We are always looking for ways to improve the execution of every product we offer. Our menu positioning and the benefits of our service initiatives, which we started almost two years ago, coupled with our excellent ambiance and first-class restaurant facilities, have allowed us to improve performance
all across our restaurant base, including both our newer and more mature restaurants.
We will always emphasize – and our fourth quarter results dramatically demonstrate – the impact of sales leverage on our business: As our restaurants mature and continue to post sales gains, the incremental profit is significant. At high sales levels, incremental profits are simply wonderful.
There are more competitors than ever in the upper end of the restaurant industry. There has been significant growth in the upper-end steakhouses, as well as many new high-end dinnerhouse concepts. Our challenge in the future will be to maintain a position in the most upscale end of the market. With a current check average of around $15.00 (excluding alcoholic beverages), we are quite moderately priced compared to many upper-end competitors, which is why we believe we offer a great value to our guests. In terms of quality, we offer a product and service experience similar to, and in some cases exceeding, a number of concepts with check averages much higher than J. Alexander’s.
Our biggest issue will continue to be retaining and attracting quality and service-oriented employees who will provide our guests with the J. Alexander’s experience. We have expanded our college campus recruiting efforts, and in the last year sixty percent of our external entry level management trainees are graduates of some of the best college hospitality programs in the country. These highly motivated, first-quality young professionals are the real cornerstones on which we will build.
| "We have expanded our college campus recruiting efforts, and in the last year sixty percent of our external entry level management trainees are graduates of some of the best college hospitality programs in the country." |
We have also made significant progress in integrating technology into our business. All our restaurants are linked to our Nashville Support Center. All of our management employees have access to our data network when training or based outside of home market. We have improved communications between the Support Center and the restaurants and are now able to distribute information in a more timely and efficient manner. All of our restaurants have a fully integrated point of sales and financial management system. We are committed to using technology to make the Company more efficient and to gain a competitive edge.
I have discussed on several occasions the change in development strategy we began in 1997. We now focus exclusively on larger markets (generally in excess of 1.5 million people) and on sites in those markets with a population density above 150,000 people (five mile radius), preferably at least 200,000, in higher income areas (median incomes in excess of $60,000). We believe these criteria give us a greater opportunity to build sales more quickly and to meet our financial return criteria more rapidly, while limiting the extra (often a lot extra) time, energy and money necessary to ratchet up an underperforming restaurant.
Our new West Bloomfield, Michigan restaurant certainly has proved the strength of our theory. We expect this restaurant’s sales to exceed $4.5 million during its first 12 months of operation and that it will continue to post sales increases thereafter. It was profitable under roof within 90 days.
Our new Cincinnati restaurant, which will open this summer, was also developed under our more stringent criteria, and we expect similar results. Most of our current development activity is centered around markets in which we already operate, concentrating specifically on the Detroit, Chicago and south Florida markets. We are also evaluating several upscale sites in other large markets. As we said last year, we would like to open two restaurants a year if, but only if, we find locations that meet all our criteria.
We opened only one restaurant last year because we stayed true to our requirements. Patience is the key to developing a great collection.
Obviously, as sales and profits continue to improve, we will consider moving the development rate up at some time in the future. However, we must not sacrifice site quality for quantity. In addition to our Cincinnati project, we hope to have another site under contract soon.
| "...we want J. Alexander’s to be a great place to work, where our Champions and Coaches alike will have terrific opportunities to pursue their career goals. Finally, we want our shareholders not only to own great restaurants, but also to have a first-quality investment." |
Last year we posted a weekly same store sales increase of 4.1 percent. Our mature restaurant base (the 14 restaurants open for more than two years) achieved a weekly sales average of $81,000, up from $77,400 in 1998. Consolidated restaurant level earnings increased 28 percent in 1999, on top of a 31 percent increase in 1998. Our operating focus for 2000 will be to continue to build same store sales, while at the same time improving our restaurant operating income. There is still significant earnings leverage from increasing sales in our existing restaurant base. Even with our modest development rate, we expect to achieve the continued performance improvements necessary to realize our goal of being a superior financial performer.
In summary, we will continue to focus on building sales in each of our restaurants by offering our guests high-quality products, superior service and great value, all of which combine to constitute the J. Alexander’s experience. This is a time-tested formula that we know will be successful. At the same time, we want J. Alexander’s to be a great place to work, where our Champions and Coaches alike will have terrific opportunities to pursue their career goals. Finally, we want our shareholders not only to own great restaurants, but also to have a first-quality investment.
You, our owners, have been patient as we have acquired increasing mind-share of dining customers in our markets, by doing whatever is necessary to maximize their experience at J. Alexander’s and thereby build a successful long-term franchise. The year 2000 will be extremely important for us. We realize that we need to manage our business for successful financial returns, as well as to give our guests a superior dining experience. We believe that in 2000 we can continue to reduce cost of sales by at least 100 basis points without compromising our guests’ experience. With continued emphasis on a changing daily menu, we hope to be able to gain labor efficiencies and continue to improve restaurant operating income. We have made noticeable improvements in restaurant operating income in each of the last two years
and expect more in 2000. We look forward to the future. We feel a deep responsibility to continue to build on the outstanding reputation that we have achieved and to meet the expectations of our guests, employees and shareholders.
Sincerely,
Lonnie J. Stout II
Chairman, President and
Chief Executive Officer
