Comp trends improved on a two-year average basis during the fourth quarter at both the Bistro and Pei Wei, but fell short of the street’s expectations, particularly at the Bistro where same-store sales growth came in +0.1% versus the street’s +1.0% estimate.  At first glance, it appeared that PFCB’s reported $0.64 per share easily beat the street’s $0.57 per share estimate, but after a closer look, we learned that it was a low quality beat as a lower tax rate during the quarter added about $0.07 to $0.08 per share to earnings.


Management maintained its 10% FY11 EPS growth guidance; though off of the $1.95 per share base, which excludes the full-year tax benefit in 2010, rather than the reported $2.01 per share.  That being said, the company slightly lowered its revenue growth guidance to up 3-4% from its prior mid single-digit growth range and reduced its planned Pei Wei openings to 6-8 from 10-12 (company maintained its two-year goal to open 25-30 Pei Wei restaurants).


Management said that it expects to achieve 1-2% comp growth at both of its concepts during FY11 and seemed encouraged by the fact that comps at the Bistro and Pei Wei were running up about 1% quarter-to-date in 1Q11.  Based on recent two-year average same-store sales growth trends at the Pei Wei, I think the 1-2% full-year comp guidance is achievable and the high end of the range is likely.


I am more wary of the company’s ability to pull off +1-2% comp growth at the Bistro, however, as it implies a significant acceleration in two-year average trends throughout the year.  Although the +1% comp at the Bistro quarter-to-date signals the company is on the right track toward achieving +1-2% growth for the full year, it is important to note that the company faced its easiest monthly comparison from 2010 in January when comps declined 4.4%.  The comparisons get increasingly more difficult at the Bistro as we progress through the quarter (-1.8% in February 2010 and -1.4% in March 2010) and though the year with comps having turned positive in May 2010 and remained positive through November 2010.


PFCB’s FY11 guidance assumes a YOY improvement in restaurant level margins.  The bulk of this YOY favorability is expected to fall in 1Q11 as the company laps the nearly 220 bp decline in margin that occurred in 1Q10 as a result of inefficiencies associated with last year’s Happy Hour rollout.  Margins should be helped in FY11 from the growing contribution of PFCB’s global brands business, which is a high-margin business (management guided to a nickel more of earnings from this business alone in 2011 relative to its reported $0.01 per share earnings contribution in 2010).  Offsetting this benefit, however, is the expected inflationary headwinds which are expect to hit the COGS, labor and operating expense lines of the P&L.  Specifically, management guided to a 3-4% increase in its total commodity basket, higher wage rates and healthcare costs and increasing energy and supply costs.


In order to protect and grow restaurant-level margins in 2011 (as is assumed by management’s guidance), the company stated that it will rely on price increases at both of its concepts, improved traffic and operational efficiencies.  PFCB already took a small price increase at Pei Wei during the fourth quarter and anticipates implementing a menu price increase at the Bistro during FY11 (took its last price increase at the Bistro in May 2010).  What worries me about PFCB’s guidance is that it relies on both taking price and growing traffic to offset inflation.  Unfortunately, these two strategies do not always work in unison.  Instead, price increases often stunt traffic growth, particularly during challenging economic times.


Although management highlighted that it will only take a small price increase, they seemed confident that they have pricing power at both the Bistro and Pei Wei.  They also stated that some of the YOY price increase will result from eliminating some of the recent discounting on the fringe at the Bistro.  I would not be surprised to see a fall off in traffic when the company implements its price increase.  Regardless, the traffic comparisons get more difficult at the Bistro come 1Q11, which alone, will make it more difficult for the company to grow traffic going forward.   Traffic declined for the first time in 2010 during the fourth quarter when average check increased, not surprisingly, also for the first time in 2010.  Traffic declined 0.9% during 4Q10 and that was off of a negative YOY traffic trend in 4Q09.  Traffic turned positive in 1Q10, up 0.8% and remained positive in 2Q10 and 3Q10, up 2.6% and 2.8%, respectively.  Growing traffic on top of these more difficult comparisons, particularly with increased pricing and/or less discounting, will prove challenging and could pose a threat to the company’s full-year margin growth target.


PFCB – RISKS TO FY11 GUIDANCE - Bistro traffic vs. check






Howard Penney

Managing Director


Retail Sales and Use Tax receipts data from California does not paint a pretty picture for restaurants with a high level of exposure to the Golden State.


California is in the news today as home sales hit their lowest level since January 2008.  The high low society is not merely confined to the east coast – sales of luxury homes rose for the first time in five years during 2010, according to DataQuick Information Systems in San Diego.  A bearish housing market is bad for consumers, of course, and Hedgeye’s view remains bearish on housing on a national basis. 


Looking at tax receipts data, however, provides a very interesting insight into how the consumer is faring in California.  It is clear from the three charts below that California-centric restaurants are facing a possible downtick in comps, if Retail Sales and Use tax receipts trends remain on their current trajectory.  Furthermore, it seems that management teams are aware of this.  The quotes below outline management commentary on California from the most recent earnings transcripts for CAKE, CPKI and PFCB.  As you will read, there is a certain degree of hesitancy to discuss the Golden State. 





Q: Can you give us an update on California?

A: Well, California in the fourth quarter was – first of all, we saw strength in key geographies like Texas and the Midwest and Florida and the Southeast. But the impact of – it's hard to measure California in the fourth quarter because we had a period of time where it rained non-stop for like nine days in a row.





During the most recent conference call, commentary on California trends was conspicuously absent!



PFCB (from call today):

Where we saw weather, we saw negative comps.  California went back to negative because of this. 








Howard Penney

Managing Director

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Japan’s Jugular Update

Conclusion: Below we revisit our intermediate and long term theses on Japanese assets – the both of which are decidedly bearish.


Position: Short Japanese equities via the etf EWJ.


Earlier this morning, we opened a short position in Japanese equities in the Hedgeye Virtual Portfolio. At current prices and overly bullish sentiment, the short idea looks much better than it did on October 5th, when we introduced our Japan’s Jugular thesis. For the sake of an easy refresher, we’ve updated the presentation and added a few more slides to reflect the current setup:'s%20Jugular.pdf


As a quick reminder, the Japan’s Jugular thesis is two-fold in duration:


Intermediate-term TREND (Bearish on Japanese equities):

  • The benefit derived from yen weakness is vastly overplayed, setting up for an asymmetric risk/reward opportunity on the short side as consensus underestimates the weak yen’s impact on corporate profitability via higher input costs;
  • Slowing growth abroad – particularly in emerging markets – will crimp Japanese export and manufacturing growth, which will result in higher unemployment;
  • Slowing consumption growth in the US creates an even higher asymmetric risk/reward setup for Japanese export growth that “no one will have seen coming”; and
  • Consumption growth in Japan (~60% of the economy) is rolling over as higher prices on the margin diminish demand and confidence remains depressed. 

Long-term TAIL (Bearish on the Japanese yen; Bullish on Japan's CDS):

  • A rapidly aging and declining population will continue to weigh on growth and Japan lacks the domestic savings and foreign capital to invest in its long term potential output;
  • Demographics, regulatory uncertainty, and a favorable cultural mindset towards entitlements will make it impossible to radically rein in entitlement spending and retirement benefits, which will render both the Japanese government and Japanese pension funds insolvent.
  • Waning domestic and global demand for JGBs will force the BOJ to do a lot more of what Paul Krugman suggested they do back in ’97: PRINT LOTS OF MONEY to finance debt issuance and keep rising borrowing costs from crushing the economy. QE2 pales in comparison to the amount of fiat money-printing the BOJ will have to do to “comprehensively ease” over the next decade. 

We intend to trade around our exposure to Japanese equities, understanding full well that the EWJ will minimize gains as the yen is likely to appreciate near-term vs. the $USD (we’re short UUP as well). That said, our research from both a fundamental and quantitative perspective suggests Japanese equities are a good short here.


Darius Dale


Who is Germany’s New Bundesbank President?

Today German Chancellor Angela Merkel named Jens Weidmann as the new Bundesbank President to replace Axel Weber following his formal indication late last week that he will leave his post at the end of his term on April 30th, and will not run to succeed ECB president Jean-Claude Trichet, whose term ends in October.


Weber’s decision to step down (and he was widely viewed as the top candidate to succeed Trichet), as well as the appointment of Weidmann, are significant as it relates to the shape of Germany’s and Europe’s monetary and fiscal policy. So who is Weidmann?



-Born on April 20, 1968

-Age 42 = the youngest head of the German central bank in its 54-year history and also the youngest member of the European Central Bank’s governing council

-Married with two children

-Ph.D. in economics at Bonn University

  • 2006 – Present: currently Merkel’s senior economic advisor and head of the economic and financial directorate of the Federal Chancellery
    • He is also German’s “Sherpa” for meeting of the G8 leading nations and G20 industrialized and developing countries
  • 2003-2006: head of Bundesbank’s Monetary Policy and Analysis Group
  • 1: Weidman served as secretary-general of the German Council of Economic Advisors (the 5 German wise men)
  • 1997-99: worked for the IMF in Washington
  • ~1987: studied economics in Aix-en-Provence, Paris, and Bonn and did internships at the Bank of France, the German economic ministry and in the central bank of Rwanda

Past Stances:

  • Weidmann worked feverishly behind the scenes to hammer out rescue plans for German banks embroiled in the global financial crisis and for carmaker Opel
  • Last year, he quietly supported Economy Minister Rainer Bruederle’s right to reject aid for Opel, the European arm of U.S. carmaker General Motors, even though Merkel was in favor of providing assistance to safeguard German jobs
  • He urged Merkel to resist quick aid for Greece and to involve the IMF in any European aid program, winning both arguments over the opposition of Finance Minister Wolfgang Schaeuble

What’s clear is that Weber leaves a large leadership hole with his departure, not only due to his experience, but in our opinion, due to his hawkish and conservative policy values, including dissention with Jean-Claude Trichet. Weber displayed firm opposition to the ECB’s bond repurchasing program; was proactive in addressing inflation threats to maintain price stability; and voiced opposition to blanket bailout facilities for Eurozone members.


In short, we question if Weidmann will remain true to the former Bundesbank ideals of hawkish monetary and fiscal policy. His Ph.D. professor Manfred Neumann said, “ He’s a contrast to Weber, not in terms of substance but in his manner.” Clearly the Francophone Weidmann has been shaped by Weber, who he studied under and was hand-selected by in 2003 to join the CB, and comes to his new role with great achievement, most currently as Chancellor Merkel’s main economist to direct Germany’s policy through the financial, economic and Eurozone debt crisis.


We’ll let actions speak for themselves, however we hope that Weidmann can uphold where Weber left off in influencing hawkish fiscal and monetary policy on the ECB council, and moreover helps shape the threat of rising inflation throughout the region and policy to deal with the ongoing debt and deficit imbalances of some Eurozone member states.


This week we’ll publish on the leading candidates for the ECB presidency.


Matthew Hedrick



Bullish on Bread – Trade Update


Position: Long grains (via the etn JJG)


We added a long position in soft commodities via the etn JJG in the Hedgeye Virtual Portfolio.  The etn was on sale yesterday due to strength in the US dollar and a strong soybean crop report out of Brazil, and we jumped on the buying opportunity.  As a reminder, commodities (measured by the CRB commodity index) have a -0.80 inverse correlation to the US dollar over the last six weeks.


We have recently been playing the softies with long positions in corn (etf CORN) and sugar (etn SGG), though here and now we prefer JJG because it has a lower beta.  JJG gives you a nice mix of grain exposure with positions in the futures contracts of soybeans (39%), corn (37%), and wheat (24%).  Long JJG is an excellent way to be long inflation.


JJG was added into the portfolio at $55.18.  From a quantitative setup, JJG has no upside resistance and TRADE line support at $54.34 and TREND line support at $51.03, suggesting a favorable near-term risk-reward setup.


Bullish on Bread – Trade Update - JJG


Kevin Kaiser


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