PFCB is scheduled to report 4Q09 numbers before the market opens tomorrow. The company continues to outperform its peers, up nearly 14% in the last month relative to the casual dining group’s average 7% move higher. As I said on January 12, in a post titled “PFCB – 2010 NOT AS DIRE AS 2009,” I would not be surprised to see this name work on the long side, largely in response to the Co-CEO Bert Vivian’s more optimistic tone at the Cowen and Company Consumer Conference. The company has a current short interest of 33%, the highest level among its peers. Despite PFCB’s recent outperformance, this high short interest, combined with the fact that it has more sell-side analysts betting against it than any of its peers, only strengthens my conviction.
My expectations for the quarter are in line with consensus from both a top-line and bottom line perspective. My $0.40 4Q09 EPS estimate assumes a -5.0% comp at the Bistro and a +2.0% comp at Pei Wei, only slightly better than the street’s -5.3% and +1.8% comp estimates, respectively. Operating margin should improve slightly YOY in the quarter, but management’s comments about current trends should matter more.
The chart below shows how PFCB has traded one-day post earnings versus reported comp trends at the Bistro. I think if we see the Bistro trends improve on a 1-year basis (as my -5.0% estimate would imply relative to -8.5% in 3Q09), the stock will likely move higher as well. For reference, both -5.0% at the Bistro and +2.0% at Pei Wei would still imply some sequential deterioration on a 2-year average trend from 3Q09, which is in line with what we saw for the overall casual dining average as measured by Malcolm Knapp. The -5.0% estimate assumes only a 25 bp quarterly sequential slowdown in 2-year average trends at the Bistro relative to the 125 bp sequential decline in 3Q09.
Mr. Vivian stated at the Cowen conference in January that he expected to see a tick up in trends from business customers, which make up about 30% of tickets at the Bistro. If trends start to get better on the margin, I think this name will continue to work. Mr. Vivian guided to roughly flat revenues and margins in 2010. Operating margin compares get more difficult in 1H10 as the company will be lapping its 100+ bps of improvement in 1H10, largely driven by cost saving initiatives. Again, I think top-line trends will matter more to PFCB’s performance in the near-term.
PFCB will generate a lot of cash in 2009. The company guided to $70 to $80 million in full-year free cash flow and I could see the company coming in slightly higher. Mr. Vivian’s 2010 guidance assumes a “similar magnitude,” but I think free cash flow could come in better in 2010 as well. The company has said it will continue to use this cash to pay down debt (expects to be completely paid down by mid-year 2010) and buy back shares. On the 3Q09 earnings call, management said it expected its full-year share count to come down by 4% to 5% in 2009, which implies an increased level of share repurchase in the fourth quarter.
2010 Outlook provided at the Cowen and Company Consumer Conference last month:
- Development: 5 units each for Bistro and Pei Wei, modest growth. There are currently 196 Bistros and the company thinks the concept has the potential for 250 units over time. We could expect increased development in 2011 with closer to 8-10 new Bistro restaurants and 15-20 Pei Wei units. And, we could see a few more in 2012.
- Same-Store Sales Growth: Even with the expected modest pick-up in sales trends out of its business customers, the company is not expecting positive comps for the full year in 2010 (maybe turning positive near the end of the year). Specifically, modestly negative comps at the Bistro and positive comps at Pei Wei seem reasonable. The company has no plans to raise prices in 2010, but Mr. Vivian stated that “If the world gets better, we might take advantage and take a little pricing.”
- Revenues: Translates into roughly flat revenues in 2010.
- Restaurant level margins: Roughly flat with 2009. This assumption is based on the company’s current outlook for slightly favorable food costs offset by slightly unfavorable labor costs. Based on contracts in place, protein costs should be favorable over 2009. Produce is not contracted and has the same weight as chicken or beef, but assuming no plague, produce should be slightly favorable as well.
- Non-operating expenses: Preopening expense, interest expense and G&A are all expected to come down in 2010.
- Free cash flow: Free cash flow should be of similar magnitude to 2009. Debt will be paid down by mid-year, which leaves about $40-$50 million available for share buybacks. In general, he plans to clean up the balance sheet and take the share count down, which should put the company in good shape by year-end.