PNRA - Checking in on the Model

PNRA was one of the few restaurant stocks that saw its price increase in 2008 and it increased significantly, up 45% relative to the restaurant group's average 40% decline. And, the company's stock performance was warranted. Year-to-date, however, PNRA's stock performance has lagged the group, down 7% versus up 50%. Using our "Research Edge Restaurant Process" metrics (please refer to the post dated June 22, 2009), which look at how a company manages its cash and deploys new capital in the business, PNRA management made a lot of the right decisions and improved the company's sustainability trends in 2008. The company reduced its 2008 new unit development by 60% and cut its capital expenditures in half. As is typically the case when a restaurant company decides to slow new unit growth and focus on its core business, PNRA was able to grow operating margins in 2008 after four years of declines and reverse two years of declining returns on incremental investment.

Relative to PNRA's recent stock performance, these sustainable trends should continue throughout the balance of 2009 as the company has maintained its more prudent level of new unit growth and capital spending. We should see another year of margin improvement, but I would not be surprised to see somewhat of shortfall relative to management guidance and consensus in the second quarter as the benefits that stemmed from slowing growth really started to impact the P&L in 2Q08. In 2Q09, PNRA is facing its toughest same-store sales comparison of the year and a difficult operating margin comparison as 2Q08 marked the first time PNRA grew its operating margins on a YOY basis in over 10 quarters.

Management guided to a -1% to flat same-store sales number for the second quarter and said that it expects FY09 operating margins to come in at the high end of its targeted 75 to 125 bps of improvement. Given the tough 6.5% same-store sales comparison from 2Q08 and the fact that most restaurant commentary regarding May and June trends has been less than favorable, I think it could prove difficult for PNRA to post only a 1% comparable sales decline. For reference, even a 1.5% decline would still mark a sequential improvement in 2-year trends from Q1. This weaker than expected top-line number will put real pressure on margins despite the expected food cost favorability in the quarter (lower wheat costs are expected to benefit food costs by $5 million in the second quarter alone).

To help build top line momentum, PNRA has been testing media (radio/billboards) in roughly 50% of its markets for the better part of two years. In 2009, the plan is to increase the media impressions up to 70% of the store base beginning in 3Q09. In 2010, marketing will become a larger part of driving traffic growth; it will not be until the company executes a TV strategy (currently in test) that we will see incrementally better sales trends. In the short run, the results appear to be lumpy.

Even with same-store sales down in the quarter, I am still modeling margin expansion in the quarter, which points to the increased operating leverage in the business model post 2007, but I think earnings numbers could fall short of the street's EPS estimate of $0.64. Instead, the low end of management's guidance of $0.62 to $0.66 per share seems to make more sense.

PNRA - Checking in on the Model - PNRA 1Q09 SSS

PNRA - Checking in on the Model - PNRA 1Q09 EBIT


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