P.F. Chang's, Hungry Again?
P.F. Chang’s China Bistro (NASDAQ: PFCB) sees declining same-store trends in Q2, but diners may again crave Chinese in an hour.
(Companies in this article: PFCB, EAT, DRI, CAKE, APPB)
By its own accord, P.F. Chang’s reported disappointing results in the second quarter, letting down investors and management alike. The company missed its own sales and earnings forecasts, mainly due to traffic shortfalls at both its P.F. Chang’s China Bistro and Pei Wei Asian Diner segments.
The source of PFCB’s woes are not isolated to the restaurateur nor are they endemic to the Chinese segment, in The Greek's view. A good deal of America’s casual dining chains have shown signs of trouble, including industry leader Darden Restaurants (NYSE: DRI), which recently announced store closures and a plan to sell its Smokey Bones unit. Popular theory holds that mounting pressures on consumers, including higher gasoline and food costs, as well as reduced home equity values and in some instances upward adjusting mortgage payments, are leading consumers to cut back spending on discretionary items.
Chang’s still managed 18% revenue growth in Q2, driven mostly by its greater store count, but the Asian cuisine pioneer missed its own forecast by $3.9 million. The Bistro grew revenues 13.3%, but fell short of its forecast by $1.8 million due to a same-store decline of 1.3%. At Pei Wei, revenues rose 38.7%, benefiting partly from same-store sales growth of 1%. However, this missed the company’s forecasts by $2 million, based on same-store sales expectations for 1.7% growth. During the conference call, the segment's operation chief took some of the blame, explaining that he had perhaps set expectations too high for new stores.
However, there was some anecdotal evidence provided in the call that indicated housing woes were partly to blame. PFCB’s weakest operating regions in the quarter included California, Nevada and Arizona, where housing problems are intensified. With some 28.5% of the company’s restaurants located in those three states, there was no avoiding the regional softness.
With revenues off forecast by nearly $4 million, margins were impacted by a deleveraging effect. Restaurant operating expenses increased as a result. The operating margin narrowed by 30 basis points, to 5.0%, and missed forecast by 50 points. Management specifically cited minimum wage rate hikes across states as an extra factor driving labor costs higher. While cost of sales increased as a percentage of sales, the company did not note any impact from rising food prices, and it was well hedged for that this year. However, protein price fluctuation could impact 2008 forecasts, depending on the degree of corn planting and demand. If feed costs continue to rise, the cost of chicken and other proteins should rise as well.
Despite the lighter margins, management noted that if not for three factors, the company might have missed its earnings goal by a greater extent. Those factors included the benefits of: the elimination of corporate level incentive compensation; an improved tax rate; and favorable partner investment expense on the buyouts of partner interests. While this is a testament to management’s savvy, we wonder how many more tricks are in the bag, so to speak. In the end, PFCB’s $0.36 of quarterly earned income per share still represented respectable 20% growth over the prior year’s quarter.
Looking ahead, management fine-tuned its forecast a bit. The company now anticipates making $1.34 in 2007, versus the $1.38 it saw earlier this year. Management’s downgraded view is based on an expectation for the continuation of drivers that impacted Q2. This is a sign that there is probably minimal internal blame being assigned, and we think it’s safe to say, they’re probably correct in attributing the weakness to overall consumer spending patterns.
The overall revenue forecast calls for the Bistro segment to see continued weakness in the third quarter, but makes no adjustment for Q4. We noticed something here. The company’s new store opening schedule was back-end heavy to begin with, so perhaps there’s more to it than same-store results. Of the 19 restaurants the company plans to open this year, only five were introduced in the first half. Still, PFCB also sees same-store revenue declining 1.6% now, versus 1.2% before.
Concern about new Pei Wei production is going to delay expansion of the concept into new markets, and limit new stores to areas where they can better benefit from infrastructure already in place, market awareness and advertising leverage. As far as this year is concerned, the company still plans to add 37 stores, with 19 already in place. While revenue expectations have been ratcheted down, management still sees positive same-store growth measuring 0.8%, where it previously expected an increase of 1.4%.
With 157 Bistro locations, 126 Pei Wei spots and one Taneko Japanese Tavern in place, P.F. Chang’s is clearly the leader in the Asian space, in our view. As the casual dining space becomes less accommodating to its participants, it’s becoming more important to take market share from competitors, so we suspect investors should consider which players are best positioned to do so.
Operating within the Asian niche is likely both beneficial and limiting for PFCB. Providing a different kind of experience, it can draw the interest of diners who are reducing their overall outings. In other words, when you go out to eat less often, you are also likely seek a unique experience more often. Americans can eat burgers at home, and despite progress and penetration of Asian foods into traditional supermarkets, there is still an intimidation factor in cooking Asian from scratch. There are some prepared food options available, but perhaps not enough. Of course, there's always the option of cheap delivery from the neighborhood shop.
The theory of niche limitation impact would be based on the amount of people within the market that eat Asian food and like it, versus the overall market. However, Americans are adventurous, especially within the markets PFCB has initially targeted. So we suspect, the company could gain share from Americana chains and from smaller Asian competitors as well.
As a result of its recent drop in earnings estimates and price, PFCB’s P/E ratio is not all that different than before. At 27X the company’s guidance of $1.34 for 2007, the shares trade at a slight premium to analysts’ five-year growth expectation of 20%. A PEG ratio of 1.3 is not all that bad in our view (while it is up from 1.2 a week ago when we first published this article), but there remains concern as to how accurate growth and earnings estimates are, considering their direction of change. Also, the analysts’ consensus growth outlook for 2008, though typically understated, is lower than the five-year number. We would label that as analyst conservatism if not for the recent forecast adjustment lower.
Relative to peers on a PEG ratio basis, PFCB matches up well with the group and is in line with the peer that closest matches its own growth, Cheesecake Factory (NASDAQ: CAKE). Now, in order to make this comparison, we had to adjust the earnings estimates of some of Changs’ rivals, as not all the fiscal years match up. Where we had to estimate a December ending consensus estimate, we simply took the average of mid-year estimates from fiscal ’07 (end May or June) and fiscal ’08. We used data provided by Thomson Financial.
Company --------- Ticker --- Adj EPS -- P/E -- 5YrGrEst -- PEG
P.F. Chang’s ------ PFCB ---- 1.34 ------ 27 ------ 20.4 ----- 1.3
Brinker Int’l ------ EAT ----- 1.78* ----- 15.6 ---- 14.3 ------ 1.1
Darden ----------- DRI ------ 2.66* ---- 16.7 ----- 11.8 ----- 1.4
Applebee’s ------- APPB ----- 1.2 ------ 20.5 ---- 13.5 ------ 1.5
Cheesecake Fctry- CAKE ---- 1.13 ------ 23.6 ---- 18.5 ----- 1.28
Applebee’s (NASDAQ: APPB) valuation offers some insight into what PFCB might go for if it were acquired. We might adjust the multiple, but if we used the 1.5X PEG ratio APPB carries, PFCB would be valued at $41, or 13% above current value (24% when we first published). The problem here is that market liquidity is drying up, and deals are likely to be fewer and far between, in our view. Still, Darden is known to be looking for a nice new growth concept…
Despite its valuation fit, investors must consider the accuracy of estimates given their recent adjustment lower. Also, in a softening dining segment, there remains risk of industry valuation adjustment as well. However, if you have to own a restaurant in your diversified portfolio, PFCB still looks like a decent relative choice.
This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. We thank you for your support of our advertisers. It and our passion for the markets are the sustaining force fueling our effort. (disclosure)
(Companies in this article: PFCB, EAT, DRI, CAKE, APPB)
By its own accord, P.F. Chang’s reported disappointing results in the second quarter, letting down investors and management alike. The company missed its own sales and earnings forecasts, mainly due to traffic shortfalls at both its P.F. Chang’s China Bistro and Pei Wei Asian Diner segments.
The source of PFCB’s woes are not isolated to the restaurateur nor are they endemic to the Chinese segment, in The Greek's view. A good deal of America’s casual dining chains have shown signs of trouble, including industry leader Darden Restaurants (NYSE: DRI), which recently announced store closures and a plan to sell its Smokey Bones unit. Popular theory holds that mounting pressures on consumers, including higher gasoline and food costs, as well as reduced home equity values and in some instances upward adjusting mortgage payments, are leading consumers to cut back spending on discretionary items.
Chang’s still managed 18% revenue growth in Q2, driven mostly by its greater store count, but the Asian cuisine pioneer missed its own forecast by $3.9 million. The Bistro grew revenues 13.3%, but fell short of its forecast by $1.8 million due to a same-store decline of 1.3%. At Pei Wei, revenues rose 38.7%, benefiting partly from same-store sales growth of 1%. However, this missed the company’s forecasts by $2 million, based on same-store sales expectations for 1.7% growth. During the conference call, the segment's operation chief took some of the blame, explaining that he had perhaps set expectations too high for new stores.
However, there was some anecdotal evidence provided in the call that indicated housing woes were partly to blame. PFCB’s weakest operating regions in the quarter included California, Nevada and Arizona, where housing problems are intensified. With some 28.5% of the company’s restaurants located in those three states, there was no avoiding the regional softness.
With revenues off forecast by nearly $4 million, margins were impacted by a deleveraging effect. Restaurant operating expenses increased as a result. The operating margin narrowed by 30 basis points, to 5.0%, and missed forecast by 50 points. Management specifically cited minimum wage rate hikes across states as an extra factor driving labor costs higher. While cost of sales increased as a percentage of sales, the company did not note any impact from rising food prices, and it was well hedged for that this year. However, protein price fluctuation could impact 2008 forecasts, depending on the degree of corn planting and demand. If feed costs continue to rise, the cost of chicken and other proteins should rise as well.
Despite the lighter margins, management noted that if not for three factors, the company might have missed its earnings goal by a greater extent. Those factors included the benefits of: the elimination of corporate level incentive compensation; an improved tax rate; and favorable partner investment expense on the buyouts of partner interests. While this is a testament to management’s savvy, we wonder how many more tricks are in the bag, so to speak. In the end, PFCB’s $0.36 of quarterly earned income per share still represented respectable 20% growth over the prior year’s quarter.
Looking ahead, management fine-tuned its forecast a bit. The company now anticipates making $1.34 in 2007, versus the $1.38 it saw earlier this year. Management’s downgraded view is based on an expectation for the continuation of drivers that impacted Q2. This is a sign that there is probably minimal internal blame being assigned, and we think it’s safe to say, they’re probably correct in attributing the weakness to overall consumer spending patterns.
The overall revenue forecast calls for the Bistro segment to see continued weakness in the third quarter, but makes no adjustment for Q4. We noticed something here. The company’s new store opening schedule was back-end heavy to begin with, so perhaps there’s more to it than same-store results. Of the 19 restaurants the company plans to open this year, only five were introduced in the first half. Still, PFCB also sees same-store revenue declining 1.6% now, versus 1.2% before.
Concern about new Pei Wei production is going to delay expansion of the concept into new markets, and limit new stores to areas where they can better benefit from infrastructure already in place, market awareness and advertising leverage. As far as this year is concerned, the company still plans to add 37 stores, with 19 already in place. While revenue expectations have been ratcheted down, management still sees positive same-store growth measuring 0.8%, where it previously expected an increase of 1.4%.
With 157 Bistro locations, 126 Pei Wei spots and one Taneko Japanese Tavern in place, P.F. Chang’s is clearly the leader in the Asian space, in our view. As the casual dining space becomes less accommodating to its participants, it’s becoming more important to take market share from competitors, so we suspect investors should consider which players are best positioned to do so.
Operating within the Asian niche is likely both beneficial and limiting for PFCB. Providing a different kind of experience, it can draw the interest of diners who are reducing their overall outings. In other words, when you go out to eat less often, you are also likely seek a unique experience more often. Americans can eat burgers at home, and despite progress and penetration of Asian foods into traditional supermarkets, there is still an intimidation factor in cooking Asian from scratch. There are some prepared food options available, but perhaps not enough. Of course, there's always the option of cheap delivery from the neighborhood shop.
The theory of niche limitation impact would be based on the amount of people within the market that eat Asian food and like it, versus the overall market. However, Americans are adventurous, especially within the markets PFCB has initially targeted. So we suspect, the company could gain share from Americana chains and from smaller Asian competitors as well.
As a result of its recent drop in earnings estimates and price, PFCB’s P/E ratio is not all that different than before. At 27X the company’s guidance of $1.34 for 2007, the shares trade at a slight premium to analysts’ five-year growth expectation of 20%. A PEG ratio of 1.3 is not all that bad in our view (while it is up from 1.2 a week ago when we first published this article), but there remains concern as to how accurate growth and earnings estimates are, considering their direction of change. Also, the analysts’ consensus growth outlook for 2008, though typically understated, is lower than the five-year number. We would label that as analyst conservatism if not for the recent forecast adjustment lower.
Relative to peers on a PEG ratio basis, PFCB matches up well with the group and is in line with the peer that closest matches its own growth, Cheesecake Factory (NASDAQ: CAKE). Now, in order to make this comparison, we had to adjust the earnings estimates of some of Changs’ rivals, as not all the fiscal years match up. Where we had to estimate a December ending consensus estimate, we simply took the average of mid-year estimates from fiscal ’07 (end May or June) and fiscal ’08. We used data provided by Thomson Financial.
Company --------- Ticker --- Adj EPS -- P/E -- 5YrGrEst -- PEG
P.F. Chang’s ------ PFCB ---- 1.34 ------ 27 ------ 20.4 ----- 1.3
Brinker Int’l ------ EAT ----- 1.78* ----- 15.6 ---- 14.3 ------ 1.1
Darden ----------- DRI ------ 2.66* ---- 16.7 ----- 11.8 ----- 1.4
Applebee’s ------- APPB ----- 1.2 ------ 20.5 ---- 13.5 ------ 1.5
Cheesecake Fctry- CAKE ---- 1.13 ------ 23.6 ---- 18.5 ----- 1.28
Applebee’s (NASDAQ: APPB) valuation offers some insight into what PFCB might go for if it were acquired. We might adjust the multiple, but if we used the 1.5X PEG ratio APPB carries, PFCB would be valued at $41, or 13% above current value (24% when we first published). The problem here is that market liquidity is drying up, and deals are likely to be fewer and far between, in our view. Still, Darden is known to be looking for a nice new growth concept…
Despite its valuation fit, investors must consider the accuracy of estimates given their recent adjustment lower. Also, in a softening dining segment, there remains risk of industry valuation adjustment as well. However, if you have to own a restaurant in your diversified portfolio, PFCB still looks like a decent relative choice.
This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. We thank you for your support of our advertisers. It and our passion for the markets are the sustaining force fueling our effort. (disclosure)
posted by The Greek | 9:15 PM
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