PFCB - INVESTING IN A NEW RESTAURANT CONCEPT

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. 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more