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I said yesterday that PFCB had tried to set expectations low for 1Q10, and there was a reason for it.  Earnings came in at $0.38 per share relative to the street’s $0.49 per share estimate and my $0.50 per share estimate.  Same-store sales, on the other hand, beat expectations coming in -2.7% at the Bistro and +2.2% at Pei Wei, slightly better than my -3.0% and +2.0% estimates, respectively, and easily beating the street’s -4.1% and +1.8% estimates, respectively. 

The current trend in top-line numbers is the more important indicator of PFCB’s momentum going forward.  Even with this better-than-expected result, the Bistro continues to underperform the industry benchmark as measured by Malcolm Knapp.  That being said, 2-year average trends improved 150 bps sequentially from last quarter, which is a good sign considering both the weather factor and the negative impact from the shift of the high volume week between Christmas and New Year’s Eve, which fell in 4Q09 as a result of the 53rd week in FY09.

What drove the EPS disconnect?

The $0.12 per share earnings miss relative to my estimate was surprising in light of the better same-store sales trends.  The discrepancy between the two in my model stemmed primarily from the Bistro.  Management’s full year guidance assumed flat restaurant level margin, “primarily due to expectations of favorable cost of sales offsetting the anticipated impact of deleverage of certain fixed operating costs and higher planned marketing spend.” 

The upside in my model relative to the reported numbers fell in the COGS, labor and operating (includes marketing spending) lines at the Bistro.  I was modeling slight YOY favorability on the COGS line as a percentage of sales at the Bistro, which came in up 40 bps YOY.  On the labor line, I was modeling +100 bps YOY relative to the reported +150 bp increase at the Bistro and the reported 100 bp increase on the operating line (including higher expected marketing expense in FY10) was higher than the +20 bps I was modeling (assumed a similar increase to 4Q09 on a 2-year average basis despite better same-store sales growth).  Although the company guided to increased marketing expense, management had stated that the bigger YOY increase would come at Pei Wei.  Specifically, management said for FY10 the “incremental marketing spend puts pressure on the operating expenses, about 50 basis points at Pei Wei, 20 basis points at the Bistro.”

For reference, a $0.10 earnings miss at PFCB translates into only about a $2.3 million miss on the net income line so it does not take much incremental spending to move the needle on EPS.  PFCB could easily have spent $1 million more on marketing.  Being that that the company, along with Unilever, launched its new PF Chang’s Home Menu frozen food product this quarter, I would not be surprised to learn the company had to spend behind the launch during the quarter.  It is important to remember that management has not yet disclosed too many details about its licensing agreement with Unilever except to say that the new venture would not require any capital investment from PFCB.

Howard Penney

Managing Director