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

Athletic Footwear Remains Week (again)

Weekly trends for footwear remained weak for the third week in a row, but the overall trajectory was essentially unchanged.  We suspect there will be a lull in near-term in momentum as retailers clear inventory for the back to school season and await help from the calendar to drive demand.  With overall industry trends remaining soft, there were few brand callouts this week.  Converse picked up some momentum, with a 10.6% increase vs. only 1% last week.  Van’s showed the most volatility, with sales declining 13% after increasing 31% last week.  As we highlighted the other day, Under Armour appears to be in clearance mode in the sporting goods channel.  ASP’s for the brand decreased from $81 to $75 over last week.  Overall, athletic footwear trends remain stable but decidedly negative and it remains much too early to make a call on back to school.

Athletic Footwear Remains Week (again) - Sporting Goods Channel Table

Athletic Footwear Remains Week (again) - Footwear and Apparel in Sports Retailers

Athletic Footwear Remains Week (again) - Footwear APparel ASP

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Russian Banking Woes

OAO Sberbank reported today that first-half net income fell 92% to 5.3 Billion Rubles or $170 Million from a year earlier. In our post “Ripples In Russia” from 7/17 we highlighted the underlying fundamentals that may pose intermediate to TAIL term risk to the performance of the Russian stock market (RTSI). Sberbank’s 1H ’09 numbers today underline the precarious situation of Russian banks, struggling with low capital levels due to the rise in bad loans, the depreciation of asset values and non ruble debt -while the Kremlin continues to provide assurances that banks will continue to lend. Can the center hold?

Prime Minister Putin, who has increasingly taken on responsibility for leading the economy, was on the tape today saying that Sberbank, the country’s largest bank, should keep lending and not close branches, calling 14% an acceptable interest rate for banks to charge. (In context, 14% represents a 300bp premium over the central bank’s current refinancing rate.) 

Transparency and accountable remain major issues when talking about the Russian economy. That said, it’s painfully obvious that the undercapitalized banking sector is in a precarious position and something has gotta give. At this point a bank bailout would be a tall order that would certainly blow out the government’s debt ratings, and further delay the country’s longer-term recovery process.

We’ll have our Eye on Russian banks, while respecting the high correlation between RTSI energy/commodity prices.

Matthew Hedrick

Gold: Consensus Isn't Bullish Enough

On February 19th I wrote an Early Look titled “Long America, Short Gold”. For those of you that are new readers, I point that out for accountability purposes as I recall taking plenty of heat from the momentum chasing community for shorting gold.

Having already laid claim to people being “too bullish” on gold then (citing Einhorn making it his largest position at the time!), I beg for your attention to hear me know – I think consensus on gold is no longer bullish enough.

Most of you know that I want to be long what The Client (China) needs, and short what American bankers want them to need (US Treasuries, US Dollars, etc…). Gold is one of those things that China needs a lot more of. China recently reported holding 34M/oz of gold (1054 tons), but that makes them only the 5th largest holder of gold, globally, despite having the most open currency to buy more with.

There are 2 numbers that really matter here:

  1. $1.4 Trillion – that’s $1.4T out of a total $2T in Chinese reserves are in US Dollars/Treasuries
  2. 1.6% of Chinese reserves are in Gold

The average central bank holds at least 10% of their country’s reserves in gold. The Chinese are not interested in gaining exposure to any more US Dollars. Therefore the demand equation here is very straightforward. China needs more gold.

To get to 10% of reserves in gold China would actually need to buy another 5,000 tons. So next time someone tells you “the IMF” is selling 100 tons, send them the math in reply.

Gold, contrary to Mr. Bernanke missing it (inflation coming in Q4), is now breaking out to the upside. Andrew Barber and I have outlined all 3 durations for the price of gold in the chart below. Long term TAIL support remains $871/oz, and the immediate term breakout TRADE line = $931/oz.

Keith R. McCullough
Chief Executive Officer

Gold: Consensus Isn't Bullish Enough - gold


Sports Apparel Weekly Data Update

The latest weekly sports apparel data highlights a marked deceleration in the industry across all channels, with the exception of Family Retail (Meyer, JC Penny, Sears, Stage Stores).  The largest sequential delta in the data comes from the sporting goods channel, which posted a decline of 1.5% for the week vs. a  4.5% gain in the week prior.  Underlying this trend was a large 18.5% decline in the New England region, followed by a 8.7% drop in the Mid-Atlantic.  Additionally, when looking at the distribution channels, there was a positive result of 2% for the full line stores offset by large declines in urban/athletic and internet/catalog.  Average selling prices remained positive for the week as has been the trend for the month so far.  While one week does not make a trend, it is worth nothing that we are now beginning to compare against the beginning of back-to-school 2008.  With most, if not all, retailers citing a later back to school selling season this year vs. last, we would not be surprised to see near-term weakness until the current back to school period picks up later in August.

Sports Apparel Weekly Data Update - Sports Apparel Table

Sports Apparel Weekly Data Update - Sports Apparel   chart

Sports Apparel Weekly Data Update - Sports Apparel ASP chart

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