PFCB – Taking the Right Steps in Today’s Environment

According to NPD data, the supper daypart, which represents 31% of eating out occasions, has declined the most, down 1% in the March-May 2008 time period relative to up 1% for both the morning meal and lunch dayparts. This help explains PFCB’s worse than expected same-store sales results in 2Q as dinner makes up 67% of revenues at the Bistro and 57% of revenues at Pei Wei. During 1Q08, the Bistro experienced positive daypart activity during the week at both dinner and lunch and positive weekend dinner trends. In 2Q08, dinner trends during the week turned negative, leaving dinners during the weekend as the only positive daypart.
  • PFCB’s same-store sales results were also impacted rather severely by the company’s geographic exposure to Arizona, California, Florida and Nevada, which accounted for 84% of the Bistro’s total comparable sales decline, and same-store sales declines in these four states worsened sequentially from 1Q08. Pei Wei experienced considerable weakness in its Phoenix, Las Vegas, Southern California and Dallas markets. These four regions represent 41% of the concept’s comparable units and were down more than 7% in the quarter after being down 6% in 1Q08.
  • Despite weakening top-line results, the company is taking the right steps to manage the parts of the business it can control. Although the company is facing higher commodity costs, management stated that it does not expect to increase prices at either of its concepts over the next 6 to 18 months as the risk to traffic trends and customers’ overall value perception is too great. With traffic down in the 6%-7% range at the Bistro and negative at Pei Wei, I would agree that raising prices in this economic environment would be detrimental to both concepts.
  • Additionally, the company announced that it is significantly slowing its new unit growth in FY09 and plans to open 12-14 Bistros (down from the expected 17 in FY08) and 6-10 Pei Wei restaurants (down from 25 in FY08). I would be happy to see the company stop its expansion of the Pei Wei concept all together until it can generate the necessary returns, but cutting the concept’s FY09 growth by more than 60% is a step in the right direction and management is focused on improving Pei Wei margins by 200-250 bps off of 2007 levels. I was surprised and encouraged to hear management say (in response to a question) that they are currently evaluating the existing Pei Wei locations and would consider closing some locations if they determine any sites don’t have the potential to get where they want them to get. Management was clear in saying, however, that no such units have been identified as of yet. As a result of this slowed FY09 development, capital expenditures are expected to come down in FY08 (now expecting to spend $80-$90 million versus prior guidance of $105 to $115 million), which will generate increased free cash flow in the current year. This capital spending number will come down even further in FY09.
  • As it relates to things management can control, the 70 bp YOY decline in labor expenses at the Bistro is somewhat concerning as such declines in labor expense can be a red flag for a company trying to protect margins at the expense of the customer experience. Management attributed the year-over-year decline to improved efficiency and scheduling in the back of the house and said that the magnitude of the decline is not necessarily sustainable, which is encouraging.

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