PFCB – The Burt Vivian Discount Factor

PFCB’s 2Q09 earnings came in better than expectations at $0.51 per share versus the street at $0.41 per share and raised its FY09 guidance to $1.60-$1.65 from $1.45-$1.50.  Pei Wei is performing better with same-store sales relatively flat and operating margins at the concept up nearly 300 bps YOY.  Additionally, year-to-date, the company cut its credit facility borrowings in half to $40 million and repurchased $20 million worth of stock.

Most of the good news ended there.  Management comments on the earnings call regarding the outlook for the remainder of the year were less than favorable.  PFCB’s full-year guidance assumes operating margin contraction in the second half of the year after over 100 bps of expansion in both Q1 and Q2.  Management expects this margin degradation going forward will come from increased labor pressure in 2H09 as the YOY cushion from increased labor efficiencies will begin to diminish at the same time the company is faced with the minimum wage increase in July.  The company’s marketing spending will also be greater in the second half of the year, which will further hurt margins.  And, the bulk of PFCB’s new unit development will occur in 2H09 (6 new units in both Q3 and Q4) so a higher number of inefficient new restaurants will weigh on results.

Management’s guidance assumes a sequential improvement in comparable sales growth, which has not yet happened in July.  As Co-CEO Burt Vivian stated, “While comparative results should get easier once we get to the fourth quarter, there are no sign posts yet leading to that particular promise land.”

Specifically, the company is assuming a 5.5% decline in average weekly sales at the Bistro in 3Q followed by a -3.5% number in 4Q relative to -7.6% in 2Q.  In the first 3 weeks of July, management stated that traffic trends are not great.  Bistro sales trends have not improved in July on a sequential basis despite the easy comparisons with average weekly sales running down 7%, down 1% at Pei Wei.

When asked if management was being overly conservative, Mr. Vivian responded:

“We expect in our forecast for the comparison year-over-year to improve, as I said in my comments, that's not happening, yet.  So there are a number of things, again, if we're simply going to assess the odds, you may think we're being conservative.  I think we're being appropriately conservative.  The fact of the matter is, is there a chance we'll do better?  Sure.  There's a chance.  There is also a chance we'll do worse.  So I think investors need to understand the risks, and if it turns out better, that's fine.  But I don't want anyone coming back in a few months saying, gees,  Burt, you didn't tell me there was going to be pressure on operating cost, you didn't tell me you were going to spend any more on marketing and you didn't tell me the sales were soft.  And all of those things are true.”

I have questioned in the past whether Mr. Vivian’s overly cautious tone in front of investors is partly to blame for PFCB’s relatively weak valuation, particularly versus CAKE.  PFCB is currently trading at 6.1x on a NTM EV/EBITDA basis versus CAKE at 8.2x and the FSR group average of 6.7x.  The CEO’s comments today, which could very well be warranted given the difficult operating environment, will most likely not help the company’s discount valuation.  To that end, PFCB’s stock started trading down rather significantly right when Mr. Vivian started talking on the company’s earnings call at 1 pm ET today. 

Although the stock definitely reacted to his comments, the street appears to think the CEO is overly cautious because FY09 consensus estimates were already at $1.64 prior to the company raising its FY09 guidance to $1.60-$1.65 today from $1.45-$1.50.  PFCB beat Q1 EPS estimates by $0.23 and Q2 EPS estimates by $0.10.  The more the company under promises and over delivers, the less of an impact Mr. Vivian’s gloomy outlook should have on valuation.  Even with the company raising guidance and in light of the expectation for a challenging sales environment for the balance of the year, I continue to believe that the FY09 EPS guidance numbers could prove conservative.

 

PFCB – The Burt Vivian Discount Factor - pfcb


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