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PFCB reported 4Q09 EPS of $0.52, blowing away both the street’s and my $0.40 per share estimate (and the company’s internal expectations).  Management attributed the better than expected earnings results to stronger than anticipated sales trends.  Same-store sales at the Bistro declined 5.2%, much better than the 8.5% decline in 3Q09; though trends still declined about 40 bps on a 2-year average basis.  Relative to industry market share, this sequential YOY improvement enabled the company to narrow its Gap to Knapp at the Bistro to -0.3% from -1.7% in 3Q09 (as shown in the chart below). 

Comparable store sales at Pei Wei increased 3% during the quarter, impressive in this environment and implied a 20 bp sequential improvement in trends on a 2-year average basis.  Management stated that traffic trends at both concepts were actually better than the comps indicated due to lower check averages.  To that end, Co-CEO Bert Vivian stated that comps should continue to get better as we trend through 2010 and he would expect average check to be less of a drag in 2010 than in 2009.

Outside of providing full-year 2010 EPS of $2.00 (relative to the street’s $1.92 estimate), management maintained its prior outlook of roughly flat revenues (slightly negative comps at the Bistro and slightly positive at Pei Wei) and flat restaurant level margins.  Some YOY favorability in preopening, interest and G&A expense should lead to slightly better pretax margins. 

PFCB may be experiencing some pressure today because despite this in line guidance, management cautioned investors that 1Q10 would be the low point of the year from an earnings standpoint with 2H10 expected to come in stronger than 1H10.  I also think investors would like to see the Bistro outperform the Knapp index, not just narrow the gap.  Looking at quarter-to-date trends, Mr. Vivian stated that weather is always an impact but that the company has gotten off to a slower start in the quarter due to weather.  In the first 6 weeks, when weather was not a factor, however, he said that PFCB saw a continuation of the improvement in trends seen throughout the fourth quarter.  The 53rd week in 2009, which was the week between Christmas and New Year’s Eve, is a high volume week for the company and produced average weekly sales of roughly $119,000 at the Bistro relative to the average of about $90,000 for all of 4Q09.  The benefit of this critical week in 4Q09 will be offset in 1Q10. 

Margins were helped in 2009, particularly at the Bistro, by the company’s operational initiatives, allowing the company to achieve near peak margins with comparable store sales down nearly 7% for the full year.  The company will continue to look for additional cost savings in 2010, but does not expect the same magnitude of savings as in 2009.  Comps are not expected to turn positive in 2010, but the Bistro will be well positioned to grow margins once demand returns.  A continuation of positive comps at Pei Wei will only further leverage the improvements the company has made at this concept.  Management attributed the higher average weekly sales at its Pei Wei class of 2009 openings to more disciplined real estate decisions.  In 2009, the company opened 7 Pei Wei units relative to 25 new units in 2008 and 37 units in 2007.  In 2010, I would expect to see another solid class of openings and improved unit returns as the company will continue to be selective as it is only planning to open 3-5 Pei Wei restaurants. 

PFCB’s cash flow story remains intact with the company expecting to generate about $90 in free cash flow in 2010 after about $40 million in capital spending.  Management plans to use this money, along with some cash on hand (ended the year with a cash balance of roughly $63 million), to pay down its $40 million credit facility and to repurchase about $40 million of shares.  Additionally, the company initiated a quarterly variable cash dividend, starting in 1Q10.  The amount of the cash dividend will be computed based on 45% of the Company's quarterly net income and is expected to total approximately $0.90 per share relating to fiscal 2010, or about $20 million of free cash flow, based on the company’s current EPS guidance of $2.00. 



Howard Penney

Managing Director