P.F. Chang’s scales back plans for Pei Wei expansion, blames declining salesP.F. Chang’s scales back plans for Pei Wei expansion, blames declining sales

Ron Ruggless

SCOTTSDALE ARIZ. P.F. Chang’s China Bistro Inc. is putting the brakes on growth of its 137-unit Pei Wei Asian Diner fast-casual chain as sales slow at older and newly opened branches. —

Rick Federico, chief executive of P.F. Chang’s, said a difficult economy is affecting volumes at both its full-service namesake chain and the more casual Pei Wei sibling. —

Amid the slowing sales, the Scottsdale-based company said it was reducing the number of Pei Wei Asian Diners that it planned to open next year. P.F. Chang’s still plans to open 10 more branches of its flagship concept and seven more Pei Wei units this year, however. —

Federico told analysts “from a macroeconomic perspective, things have not improved, and if anything it appears that these challenges will be with us longer than we originally thought.” —

In a second-quarter conference call, Federico had said the company planned to open 37 Pei Wei units next year, but in announcing third-quarter results late last month he lowered that number to 25. The company plans to expand the 162-unit P.F. Chang’s chain by opening 18 new units in 2008. —

“Given the challenge of improving margins, we believe that trimming back new-unit growth will help us to achieve our objectives and improve the [Pei Wei] concept’s profitability in 2008 and beyond,” Federico said. —

The company said it had already signed leases for the 25 new Pei Wei locations. —

Analysts greeted the slowdown in expansion warmly. —

Lauren Burk of FBR Capital Markets said Pei Wei’s expansion “slowdown will give the company more time to work to drive higher average weekly sales, improve its labor metrics and fine-tune its real-estate selections.” —

Destin Tompkins of Morgan Keegan & Co. Inc. of Nashville, Tenn., said the chain’s “continued soft same-store sales and new-unit performance combined with operating cost pressures are concerning. However, management appears committed to improving longer-term shareholder value through a focus on margin improvement efforts and more conservative capital allocation.” —

John Ivankoe of JPMorgan said, “We applaud the slowing of the concept as both comps and new-unit volumes came under increased pressure—an unmistakable sign that growth became low quality, in our view.” —

In disclosing results for the third quarter, which ended Sept. 30, P.F. Chang’s revised downward its full-year earnings forecast to $1.19 per share from $1.34 per share. The company said the revised projection reflected lower revenue growth from anticipated same-store sales declines at both its chain concepts and the continuing of current-year cost trends including increased operating expenses. In addition, lower-than-expected sales at new Pei Wei stores would negatively affect profit for the year, the company reported. —

P.F. Chang’s, typically a star in the industry on the basis of its growth rate if not for its more modest return-on-equity record, reported the same double-whammy of weaker sales and higher costs that several other bellwether brands in the restaurant sector also have cited in third-quarter reports. —

“While not too surprising given consumer trends in restaurants and retail, [P.F. Chang’s results] mark a continuation of guarded guidance from companies that have reported,” Steven Kron, an analyst with Goldman Sachs in New York, said in a note to clients. “[That] suggests that the road gets rougher still before year end.” —

Kron, whose employer has an investment banking relationship with P.F. Chang’s, rated the company’s shares as “neutral.” —

For the Sept. 30-ended quarter, P.F. Chang’s reported net income of $5.3 million, or 20 cents per share, versus $6.6 million, or 25 cents per share, a year earlier. Revenues increased 17.3 percent to $270.9 million, mainly on restaurant openings. —

Revenues at the P.F. Chang’s China Bistro chain rose 12.8 percent to $208.5 million, which was $1.1 million below the company’s forecast. Same-store sales declined 1.6 percent on reduced traffic, the company reported. —

Revenues for the Pei Wei concept increased 33.9 percent to $61.7 million, which also were $1 million below the company’s forecast. The sales miss was pegged to lower-than-expected sales at both new stores opened during the year as well as at existing locations. Same-store sales fell 1 percent. —

P.F. Chang’s also said its board of directors Oct. 19 increased the amount of its current share repur-chase program authorization from $50 million to $100 million. Chang’s said it intended to use cash on hand and available credit lines to buy back shares. —

The company also owns Taneko Japanese Tavern, a test vehicle that debuted last year in Scottsdale and may not be its last such diversification attempt. Federico said P.F. Chang’s still sees an opportunity for it to develop or acquire a Japanese concept. However, he added, “This is not the right time for us to dilute our attention away from our core business.” —