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Although PFCB’s Co-CEO Bert Vivian opened up his presentation today by saying (I am paraphrasing), “I have been asking people if the world is coming to an end.  If so, what I am about to say probably does not matter much,” his comments regarding current sales trends were more optimistic.  Specifically, he said that management continues to believe that the second half of the year will be better than 1H10, and in line with management expectations, they are continuing to see a gradual improvement in trends across the country.  They are seeing signs of life in Arizona and California and although retail activity slowed in May in California, the Bistro continued to show steady progress. 

The company implemented a 1% to 2% price increase at the Bistro in May in an attempt to support average check, which has been a drag on comp growth as traffic has improved.  And, Mr. Vivian stated that comp growth is “getting dangerously close to getting positive.”  Weekday sales growth is improving ahead of weekend growth, which he attributes to stronger business travel spending (accounts for about 30% of Bistro’s tickets).  He also commented that sales and traffic trends at Pei Wei continue to improve in 2Q10. 

During the first quarter, PFCB’s margins suffered as the company invested behind its newly rolled out Happy Hour program.   The inefficiency around executing this new program, along with some other incremental discounting activities at the Bistro, cost the company about 80 bps on the COGS line and 100 bps on the labor line, or about $0.13 per share.  For reference, in the Happy Hour test markets (Arizona and Pacific Northwest), it took about 3-5 months for margins to normalize.  PFCB had said on its 1Q10 earnings call (and reiterated today) that this program would continue to be a slight drag on margins in the second quarter.  However, he said that with a little wind behind the Bistro from a sales perspective, combined with the price increase taken in May, operating margin should get better in the second quarter.

Mr. Vivian also outlined some potential issues, which he referred to as “black clouds”:

Europe…the company is not yet seeing any pressure that he could link directly to the recent issues in Europe.

The Gulf…Longer term, he is more concerned with the potential impact of a slowdown in drilling, particularly in Texas, which is an important state for the company from a sales perspective.

Howard Penney

Managing Director