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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

 

PFCB – RISKS TO FY11 GUIDANCE - Bistro SSS

 

PFCB – RISKS TO FY11 GUIDANCE - Pei Wei SSS

 

Howard Penney

Managing Director