I see no reason to fight the trends at PNRA. The concept operates in a segment of the industry that has very little direct competition. The breakfast day-part is being challenged by rising unemployment but PNRA’s customers appear more loyal than the bottom feeder customers that are causing MCD some difficulties.
PNRA reported 3Q09 earnings after the close yesterday and there was little not to like. Following the recent trend in restaurant earnings, PNRA’s earnings of $0.65 per share easily beat the street’s $0.58 per share estimate. Bucking the trend, however, PNRA’s same-store sales growth at both the company and franchise operated restaurants also came in better than expectations. And, the good news did not end there.
- Same-store sales have improved sequentially on a 2-year average basis each quarter this year.
- Same-store sales growth also improved on a sequential basis throughout the quarter (+2.6% in July, +3.0% in August and +4.4% in September).
- Unlike its peers, this growth was fueled by both traffic growth (+1.8%) and average check growth (+1.5%). This transaction growth represented a significant sequential improvement from 2Q’s 1.4% decline.
- Same-store sales continued to improve in Q4 with quarter-to-date underlying trends up 6.9%. This is a strong number on its own, but it is even more impressive relative to the soft October trends cited by both SONC and MCD.
- Q4 same-store sales guidance was difficult to decipher as the company provided both calendar and fiscal ranges but the given 5%-6% range seems to be the more important range to consider as it represents underlying business trends. This guidance assumes continued sequential improvement in both transaction and average check growth in Q4.
- Mix turned positive in September and has remained positive in October. Management attributed this mix improvement largely to the tick up in catering trends. PNRA’s soft catering trends have been a drag on mix as it is typically a low transaction/big ticket business. PNRA expects catering to be up 5%-10% in Q4 (was running -5% in 1H and positive in Q3), which should add about 30 bps to average check growth.
- Operating margins improved 230 bps in the quarter and PNRA is guiding to an additional 75-125 bps of improvement in Q4 and 25-75 bps in 2010.
- PNRA’s full-year 2010 EPS guidance of $3.05-$3.15 is above the street’s $3.03 estimate and assumes 3.0%-5.0% same-store sales growth (flat to 2% transaction growth).
Being the resident bear, I have a hard time believing this Q4 and 2010 guidance but the company’s Q3 same-stores sales and traffic trends were pretty unbelievable as well! This company is driving both traffic and average check growth in an extremely challenging environment.
I would say the only somewhat concerning issue discussed today stems from the company’s decision to accelerate company-owned unit growth next year. PNRA announced that it would increase its new company-owned units by more than 50%. Yes, the company’s margins have gotten significantly better in the last two years, but I would attribute a lot of that improvement to its having slowed new unit development. PNRA opened 89 company-owned restaurants in 2007, 35 in 2008, an estimated 25 in 2009 and is now forecasting about 40-50 new units in 2010.
Management said it must take advantage of the current real estate opportunities and that current returns warrant becoming more aggressive with growth now. Management also highlighted my concerns about doing so, however, when it said that new stores often generate lower returns initially due to opening costs and higher training costs. This accelerated growth will lead growth-related costs right back into the P&L and put increased pressure on returns. This might help explain why the company is forecasting 25-75 bps of margin growth in 2010 with 3%-5% same-store sales growth after driving nearly 180 bps of growth on only 1% comparable sales growth year-to-date.
I am not saying that growth is never warranted, but I would have preferred to see the company take up its new unit growth goals in a more conservative manner. That being said, this company’s current trends continue to surprise me and time will tell whether returns will hold.
