PFCB seems intent on developing a new concept. Yesterday, PFCB announced that it would provide a $10 million loan to Fox Restaurant Concepts to develop True Food Kitchen restaurants, a new Phoenix, Arizona based eatery that offers a globally inspired, seasonal menu appealing to anyone seeking a more balanced lifestyle. Under the agreement, PFCB’s loan can be converted into a majority equity position in True Food Kitchen.
It was only about a year ago that PFCB closed on its transaction to completely exit from its Taneko Japanese Tavern concept, which it had opened only about 2 years earlier. PFCB had only operated one Taneko restaurant, which failed to ever make money. Additionally, until very recently, PFCB’s second concept, Pei Wei was delivering negative returns. The company significantly slowed its Pei Wei development in FY09 and margins have grown rather significantly in each of the last three quarters. To that end, I think PFCB would be better served to continue to focus on improving returns at its current concepts rather than invoking on new restaurant concept development.
This True Food Kitchen agreement is much less risky in that it does not appear that PFCB will currently be involved in the day to day development and operations as it was with Taneko, which the company developed internally. In the near term, this investment will not have a material impact on PFCB, but given that PFCB’s loan can eventually be converted into a major equity investment, the company may become more tied to the concept going forward from both an operations and financial perspective.
From a balance sheet perspective, PFCB has already cut its debt balance in half since the start of the year and still expects to generate $70-$80 million in free cash flow so this $10 million loan should not pose any problems for the company. PFCB had said it would use its free cash flow to pay down debt and repurchase shares in FY09 so this announcement does come as somewhat of a surprise. On its most recent 2Q09 earnings call, an investor asked whether PFCB would consider going to more of a franchise model in the U.S. with its Pei Wei concept and management responded by saying:
“I don't know that we've ever said that as much as we would evaluate any opportunities that might help us develop that brand. You know, we are not constrained by capital, and we're not necessarily constrained by management resources. You know, if there was a unique opportunity that presented itself, and it required a level of partnership or franchising we would consider it. You know, we probably would, but it's not high on the list of priorities right now.”
Based on this response, maybe I should not be surprised because management did say (though in reference to Pei Wei) that PFCB was open to opportunities that required some “level of partnership.” At the same time, this comment was made less than a month ago and at that time a partnership was not a high priority. And, given co-CEO Bert Vivian’s gloomy and overly cautious near-term outlook for the restaurant environment, it is an interesting time to get involved with a restaurant concept that is in its early-stage development phase.