PFCB – Clearing the decks

I’m actually a fan of Russell Owens. I believe he did the best he could in a very difficult situation. PFCB’s core concept “The Bistro” is an extremely successful concept generating very strong returns for shareholders. In an effort to maintain growth, PFCB senior management tried to reinvest the Bistro’s cash flow into another growth concept. Unfortunately, we now know how this story ends. With Russell Owens moving on to greener pastures, the decks are cleared for PFCB senior management to make significant changes to the Pei Wei concept. It’s now likely that we will see the company close more stores to focus on a core group of restaurants. So far management has closed 10 of the165 Pei Wei stores. I suspect there are another 15-25 stores that need to be closed. The Pei Wei concept has been struggling under the weight of operational issues, which have hindered the concept’s margins.
  • Unfortunately, PFCB was one of the last casual dining companies to come to grips with the reality of today’s restaurant environment. As a result, it was not until 2Q08 that the company slowed its capital spending on new units for both Pei Wei and the Bistro and closed underperforming stores. Some of the benefit of the 10 closed Pei Wei’s will help the company as we head into 2009. Specifically, management said that they expect pretax income to improve by $2 million annually and for Pei Wei’s operating margins to improve by 70 to 80 basis points.
  • Clearly, there are some critical changes that PFCB can make to better position the company that will allow PFCB to weather the severe issues facing the industry. Unfortunately, the company has a significant number of its stores in parts of the country that have been severely affected by the downturn in the economy. Specifically, Arizona, California, Florida and Nevada accounted for 78% of the company’s total same-store sales decline in 3Q08. See our post “Casual Dining Exposed” for specific details on a number of casual dining concepts’ regional exposure within the U.S.
  • The last time the company provided guidance to the street management guided FY08 EPS to $1.34-$1.40, lowering the range from $1.36-$1.42. Currently the street is at $1.38. Complicating this guidance has been a significant downturn in sales trends since PFCB provided guidance.

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