PFCB – Earnings Preview

PFCB reports 1Q10 earnings tomorrow morning.  To recall, PFCB management said that from an earnings standpoint 1Q10 would be the low point of the year.  The company guided to FY10 EPS of $2.00, stating that 2H10 should be stronger than 1H10 and 2Q10 better than 1Q10, which implies 1Q10 earnings of below $0.50 per share.  Management also said that although top-line trends continued to improve on a sequential basis early in 1Q10 when you exclude the weather impact, weather had been a factor.  Specifically, CEO Bert Vivian commented, “ We’ve had starts and stops with respect to Mother Nature, so it’s tough. I would just caution everyone that as we look at our first quarter, we are off to a little bit slower start than perhaps we would have liked due to the weather. We’ll see how the back half of the quarter turns out.”  The shift in PFCB’s reporting calendar around the 53rd week in 2009, which was the week between Christmas and New Year’s Eve, will also negatively impact reported 1Q10 top-line trends.  The week between Christmas and New Year’s Eve was 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. 

Based on this less-than-favorable outlook, investors may not be expecting too much tomorrow.  I think PFCB management tends to be conservative.  To that end, I would expect earnings to come in a penny better than the street’s $0.49 per share estimate and above management’s implied quarterly guidance. 

The company did not give any specific same-store sales guidance for the first quarter but full-year comps are expected to be negative at the Bistro (negative in 1H and positive in 2H) and positive at Pei Wei.  Relative to industry trends as reported by Malcolm Knapp during the first quarter, PFCB’s aforementioned comments set low expectations, particularly regarding the Bistro.  The street is estimating that comparable sales at the Bistro come in -4.1%.  Although a -4.1% number would imply a sequential improvement from 4Q09 of 110 bps on a 1-year basis, it only points to an 80 bp improvement on a 2-year average basis.  Malcolm Knapp reported last night that the industry as a whole improved about 220 bps during the first quarter on a 2-year average basis from 4Q09.  That being said, if PFCB only manages to meet street expectations at the Bistro during 1Q10, I don’t think investors will be too excited because weather was an issue for all industry players. 

My comp estimate of -3% at the Bistro still implies that the concept is lagging its competitors as it would highlight a sequentially wider gap-to-Knapp on both a 1-year and 2-year basis, but it would indicate that trends are improving materially.  For Pei Wei, I am modeling +2% comparable sales growth (in line with the street’s +1.8% estimate).  PFCB has really turned the corner with Pei Wei and a +2% comp would mark the concept’s second quarter of positive same-store sales growth, which would be impressive in this environment.  Margin comparisons are tough in the first half of the year, particularly at the Bistro, as the company began to benefit from its operational initiatives in early 2009. 

It will be interesting to see if management provides any additional details around its agreement with Unilever and its new frozen food venture.  The company has not commented too much on the new agreement, except to say that it does not require any capital investment on the part of PFCB.  On the last earnings call, management said the product would be introduced in 2010 and PF Chang’s Home Menu was since launched in April.  If this agreement turns out to be anything like the one CPKI first developed with Kraft, then it has the potential to add a high margin royalty stream to PFCB’s earnings. 

PFCB – Earnings Preview - PFCB Home Menu

 

Current FY10 Guidance:


EPS: $2.00 (2H better than 1H and 2Q better than 1Q)

Revenues: roughly flat (slightly negative comps at Bistro, slightly positive at Pei Wei and reflects the impact of a 52 week fiscal year in 2010 vs. 53 weeks in 2009)

New units: 3-5 Bistro restaurants and 3-5 Pei Wei restaurants

Restaurant level margin: flat YOY (favorable cost of sales offsetting the anticipated impact of deleverage of certain fixed operating costs and higher planned marketing spend)

Depreciation: up a little bit vs. 2009

Pretax margin: better YOY (YOY favorability in preopen, interest and G&A expense)

FCF: $90M+ ended FY09 with cash balance of $63M above the typical $40-$50M range (expect to pay down $40M credit facility, $40M in share repurchase and about $20M in dividends based on 45% payout ratio)

Capex: $40M

Howard Penney

Managing Director