Conclusion: PFCB is facing easy comparisons in 3Q10 on many fronts.  At the same time, trends are getting better at the Bistro, which should make for a strong third quarter.  Co-CEO Bert Vivian’s modestly positive comments today increase my conviction that PFCB will have a marginally stronger back half of the year.

To that end, PFCB should move up and to the right into the “nirvana” quadrant of our restaurant sigma chart (positive same-store sales and growing YOY restaurant level margin) during the back half of the year after starting out the year in the “deep hole” quadrant (negative same-store sales and declining YOY restaurant level margin). 

Risk: Despite the company’s modestly optimistic outlook for the industry, our Hedgeye view is that the consumer will continue to face increased pressure in the back half of the year.


Mr. Vivian gave a broad overview of his outlook for PFCB and the industry for the balance of this year and next year at an investor conference this afternoon.  Overall, he said that the year is progressing as management had expected going into the year.  Specifically, business travel trends, or the weekday business, improved during the first half of the year while the social side of the business, primarily driven on the weekend, has caught up to-date in 2H10.  To that point, the company is seeing fairly even activity across the week on a YOY growth basis; though Mr. Vivian called the growth “modest.”


In August, same-store sales growth was positive for the Bistro in 36 of the 38 states in which it operates, which Mr. Vivian said signals a real change in tide of the overall health of the business relative to last year.  Trends were negative in all 38 states in the year-ago period.


Regional performance:  Las Vegas is currently one of PFCB’s strongest markets.  Traffic has been consistently solid this year in Las Vegas, which is a marked change from last year.  California continues to be an extremely important state for PFCB as it drives about 16-17% of sales.  Trends in California need to stay positive in order for the Bistro to be positive (California turned positive for the Bistro a few months ago).  Trends in Arizona have bounced back and forth whereas Texas and Florida have shown modest positive growth.


Commodities: The company is locked in on its commodity needs for the balance of 2010.


Share repurchase: PFCB expects to buy back about $40 million in shares in 2010.




Currently, Mr. Vivian expects 4Q10 to be ok as he thinks consumers will be out and about around the Christmas season; though people will still be looking for great value.




“Unless the solar systems collide,” Mr. Vivian expects next year to be marginally better for PFCB and the industry.  For industry trends to come in better than ok, there would need to be a significant change in the jobless situation, which he views as unlikely.


Commodities: The company is locked in on a bulk of its commodity needs through the end of FY11, with the exception of beef (which he expects to move higher).  On balance, PFCB is locked in at prices that are fairly similar to 2010 levels.


Labor:  Mr. Vivian expects higher labor costs to put some pressure on margins in 2011 as a result of increased wage rates, a higher level of turnover and higher health care costs, which are expected to be up low double digits.  The company hopes to take some price next year to offset these higher costs as long as traffic trends hold up in the back half of the year.


New openings: Current development plans include about 4-6 new Bistros each year over the next 3-5 years and about 10-15 Pei Wei openings in 2011 (closer to the low end of that range) and 15-20 in 2012.


Share repurchase: PFCB expects to buy back about $60 million in shares next year.


Unilever and International businesses: Expected to add a small, high-margin royalty stream to PFCB’s P&L over time, which requires no capital on the part of PFCB.


EPS growth: Expects to achieve low double-digit EPS growth over the next 3-5 years.




Howard Penney

Managing Director

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