PFCB – Fixing what it can control

Sales suck (for everybody), commodities are putting pressure on margins (but some relief is in sight), growth is slowing and your closing unprofitable stores. The balance sheet is strong and you are generating cash! This could be 1 of 20 companies I know!

There is nothing anybody can do to offset the macro environment, except manage the business as conservatively as you can. As Burt Vivian said yesterday, coming out of this cycle PFCB will be a much stronger more profitable company. From my perspective that was the most important comment on the entire call!!
  • That being said, for some time now, I have criticized PFCB’s unit growth initiatives. Through 2007, the company’s capital expenditures as a percent of sales continued to climb at the same time its operating margins were declining rather significantly (fell 70 bps in 2007 following 2006’s 160 decline). In 2008, however, the company slowed its Bistro development targets to 17 from 20 in 2007. Additionally, PFCB lowered its 2008 Pei Wei openings to 25 from 37 in 2007.
  • Although I was happy to see this slowdown, particularly at Pei Wei, I have argued that PFCB should halt Pei Wei’s new unit growth altogether as the concept experienced declining operating margins throughout 2006 and 2007. That being said, I am encouraged to see that PFCB is closing 10 underperforming Pei Wei locations effective immediately, which should also have an immediate impact on Pei Wei’s margins. Management also significantly lowered its new unit targets for FY09 to 6-10 Pei Wei units from 25 in FY08 and 8-10 new Bistros (from 17 in FY08). Although slowing new unit growth will not solve PFCB’s current challenges as it relates to the declining traffic trends being felt across the industry, it should improve the company’s long-term returns.

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