Conclusion: PFCB’s lowering of guidance is realistic and it is fitting that the stock has reacted as it has.  While top-line trends were soft in the third quarter, management commentary indicates that October saw improvement on a two-year basis as both concepts.

PFCB’s earnings results were on the lower side of expectations and the stock traded down accordingly after management lowered their full-year outlook for 2010 EPS to $1.95 from $2.00.  As compared to results seen by the majority of its peers thus far, the third quarter was clearly less than what investors were anticipating. 


Firstly, the Bistro posted an improvement in comps and operating margins.  The +2.3% comparable sales number was less than expectations but, more importantly, the 0.5% run-rate given for October on the earnings call implies that two year trends in October, -2.9%, have improved slightly from the -3.1% two-year average trend in the third quarter.  In terms of restaurant-level margins, the Bistro saw a year-over-year increase of 130 bps but the sloppiness that Co-CEO Bert Vivian suggested during the 2Q10 earnings call would impact the labor line may have compounded deleveraging from soft sales as the company experienced labor inflation in the quarter.  Nevertheless, margin performance was strong this quarter at the Bistro.  Management plans on raising prices “roughly 1 to 2%” at both concepts in the early part of 2011 to offset slightly higher commodity and labor costs.  How this impacts traffic is clearly a concern for investors heading into next year.  The unit growth outlook for the Bistro is for three-to-five new units in 2011, roughly in line with the four scheduled to be open by end of year 2010.


Pei Wei comps disappointed by a wider margin than those at the Bistro, coming in at +0.8%.  September comps drove this downside trend with -1.3% growth in comparable sales (-4.3% traffic!).  Running the LTO in October this year, versus September last year, is helping traffic in October by approximately 4%, according to management commentary during the Q&A session today. The +1.5% comp at Pei Wei in October is indicating a significant boost from trends in the third quarter, according to the run rate cited by management, and implies acceleration in trends on a one and two-year basis.  However, the general outlook is likely also focused on how traffic levels at Pei Wei (and the Bistro) respond to the 1-2% price increase management is planning to implement “in the first part of next year”.   Investors’ perception of sustainability, or the lack thereof, may be reflected in the stock price reaction today.  While comps are positive in 70% of states where Pew Wei operates, the most significant states in terms of exposure – CA, AZ, TX and others – are underperforming. There is room to improve on the top line for Pei Wei.  The unit growth outlook for Pei Wei is for between ten and twelve units in 2011 versus two for 2010. 


Overall, there were several other interesting points of note emerging from the earnings call:

  • 4Q10 guidance was lowered to $1.95 and G&A pressure was cited as the primary for this revision (along with the reality that 4Q making up the slack is a stretch)
  • FY11 guidance expects slight margin expansion and 10% EPS growth, which is in line with the three-to-five year plan outlined by Vivian during the presentation he gave on September 29th.  Of course, this guidance is contingent on sales holding up.  The need for sales performance and pricing is underlined by the unfavorable cost outlook provided by Vivian on the call
  • Cost pressure is clearly a concern for PFCB over the intermediate term.  While this company has one of the more straight-talking management teams in the space, hearing how “cost pressure” was going to make 2011 from the end of 1Q on “a little bit of a battle for us” was interesting
  • 4Q results will be adversely impacted by the Christmas calendar shift (Saturday this year) although management played down the significance
  • As we can see from the SIGMA chart below, margin performance in the third quarter was strong and is likely to continue in the fourth quarter.  However, top line performance remains the top priority for investors and PFCB
  • The strategy of raising price at a time when traffic growth is fragile is a risky one.  However, with food prices where they are the company has few choices
  • Labor and cost of sales are two of the primary factors Vivian cited as headwinds for FY11 EPS growth (and the reason why the company is taking price)
  • I would like more specificity as to how management is going to address the slowing trends that seem, on the evidence of this most recent quarter at least, to have bifurcated from some peer casual dining companies



Howard Penney

Managing Director

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more