PFCB – A New Risk Factor in the 10Q

I just finished reading the PFCB and noticed that the company added a new risk factor to its 10Q. PFCB is now specifically talking about new stores taking more time to reach maturity. I can only conclude that management is seeing a “new” trend in the stores it has opened recently. Not that we need to find another negative for a casual dining company, it’s an interesting development. This also help explain why they reduced new store openings again!

The following is the new text from the 10Q filed yesterday:

“As of June 29, September 28, 2008, there have been no material changes to these risk factors. factors other than the change of the following.

Failure of our existing or new restaurants to achieve predicted results could have a negative impact on our revenues and performance results as well as result in impairment of the long-lived assets of our restaurants.

We operated 182 full service Bistro restaurants, 165 quick casual Pei Wei restaurants as of September 28, 2008, 48 of which opened within the last twelve months. The results achieved by these restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in other locations. We cannot be assured that any new restaurant that we open will have similar operating results to those of prior restaurants. Our new restaurants commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as predicted could negatively impact our revenues and results of operations as well as result in impairment of long-lived assets of our restaurants.”


After two consecutive weeks where jobless claims came in lower than expected, today’s number arrived higher than forecasts at 478, 000; 10,000 more than the economists surveyed by Bloomberg and breaking the short lived winning streak for bulls looking for signs of stability.

Traders know that in a period of extreme market volatility, picking a top or bottom is very difficult –in a period of extreme economic volatility the same principal holds true. The trend in job losses has not shown signs of directional change yet.

Andrew Barber

September Casual Dining Trends – Plain Ugly

Casual dining same-store sales declined 3.8% in September with traffic falling 6.5%. The casual dining industry has not experienced a traffic decline of this magnitude going back to 2000, and now this is the third consecutive month of 6%-plus declines. Looking at the chart below, I think Burt Vivian, president of P.F. Chang’s China Bistro, described it best yesterday, “In short, July and August were not pretty. September was just plain ugly.”

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SKX: Predictably Disastrous. Numbers Still Too High

No, Skechers is not missing and guiding down because of a ‘weak retail environment’ or ‘tough consumer’ as management suggests that they are. It is because the confluence of factors that allowed this company to triple its margins over 4 years has hit its breaking point. Its’ sales/inventory/margin triangulation has shifted into the worst place possible (see Exhibit below) and I think it is destined to stay there for quite some time. Unfortunately, the company still does not believe it. They did not set expectations low enough. I won’t touch this stock until it approaches $5.

I’ll repeat the narrative I threw out to clients on September 3.
A) Over the past four years, a shift in fashion towards low profile (SKX sweet spot) accelerates growth and propels margins from 0% to 9%.

B) Low profile growth finally losing share to Performance – starting this fall.

C) Along the way, SKX opens up more high-fixed –cost company-owned retail stores to get product to consumers despite less interest from retail.

D) SKX broadened wholesale distribution to more marginal channels (Goody’s, Mervyn’s).

E) SKX is taking its next leg of growth overseas. Grows more aggressively into Hong Kong and Macao with a goal to triple sales there in 3-years. Maybe they should have thought of this 3-years ago before a 20% run in FX? FX moves are always hindsight 20/20, but this is another example of a poorly managed company in this space deploying capital reactively. Proactive always wins in my book. I think Skechers’ recent announcement that it is expanding its Asian JV with the Onwel Group is another nail in the coffin.

F) SKX has become more litigious, suing a smaller brand after years of fighting against economic harm from knocking off styles.

G) In August, SKX bid for Heely’s. C’mon team Greenberg…Are you serious??

H) We have not even started talking about losing space in Asian factories to more established brands, and increased cost pressure SKX will see starting in 1Q due to higher FOB costs (freight on board – or total fully loaded import cost). This will be a margin crimper.

There’s no doubt in my mind that margins are getting cut in half here – as I’ve noted since my initial June 4th note (SKX: Can It Really Be This Simple?).

I’ve got EPS going from $1.70 in ’08 to $0.85 in ’09, and EBITDA declining by a similar magnitude. The bottom line is that I would not even think of buying this stock until it was at a 3x EBITDA multiple on my numbers. That equals $5.10.


In my 8/31/08 post “HOT: WHERE DO ESTIMATES GO W/O NYC AS THE SAVIOR” I predicted 2009 consensus EBITDA and EPS estimates needed to come down by 10-15% and 25%, respectively. Today, HOT provided guidance 13% and 23% below estimates, respectively, so pretty close. However, given the very difficult comparisons facing the company in the first half of 2009, and difficult 2 year comps for most of 2009, I’m beginning to think the guidance is not conservative enough. Management has not exactly been stellar in their predictions.

  • Here is the eye opening statistic that forces me to really question the 2009 guidance. Q4 REVPAR at Branded Same-Store Owned Hotels in North America is now expected to decline 9% to 11%. Yes that is against a tough comparison. However, it is such a sharp deterioration from +3% in Q2 and flat in Q3 that it brings into question why management settled on only a 5% decline next year.

  • From a company perspective, HOT is clearly underperforming MAR. This is understandable due in part to the lack of hotel ownership in MAR business model. However, HOT’s significant exposure to some of the previously “hot” markets of NYC, London, and Hawaii is now a liability. I’ve written posts on each one of these markets over the last two months highlighting HOT’s exposure. We focus a lot on deltas here at Research Edge and the delta in these markets is hugely negative.

  • I’ll have some more to say on HOT in the areas of timeshare and cash flow but for now, I still see downside risk.

Not exactly a stellar record on guidance
Comparisons remain tough throughout most of 2009 on a 1 and 2 yr basis

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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