Chang's Cash Is the Thing

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Taking a page out of the Outback Steakhouse (NYSE: OSI) playbook, fast-growing restaurateur P.F. Chang's (Nasdaq: PFCB) rewards new store managers with minority interests in their units. The reasoning is brilliant. Giving a manager the opportunity to buy into an eatery encourages performance as well as shrewd cost management. More importantly, in a sector where employee turnover is stubbornly high, ownership neuters the entrepreneurial urge to roam.

So when Outback was taken to task for its partnership expense accounting by the SEC last year, Chang's decided to check its own standards to make sure they lined up with the preferred compensation accounting model for its partnership program. The end result will hit the company's income statements like a "won ton" brick.

Chang's must now restate its past few years of earnings sharply as it crunches its financials to treat the partnerships as compensatory. As a result, earnings per share for the last three years have been revised downward.

The move will also impact this year. Chang's had guided investors to expect $1.36 a share in earnings in 2004; that has been trimmed back to just $0.97 a share after the necessary charges. Specifically, each new namesake location opened now carries an additional $275,000 expense to comply with the SEC standards.

The company, which succeeded where casual dining rivals like Darden (NYSE: DRI) failed in taking a Chinese concept national, insists that this is strictly bookkeeping and that the changes won't alter the company's cash flow projections. That's true, of course. If the investing community could be more in tune with cash flow-based valuation metrics instead of hanging on reported earnings, this would have been a non-event.

Chang's is an interesting chain. In the mold of Cheesecake Factory (Nasdaq: CAKE), it's a popular concept that has moved beyond fad by keeping its comps buoyant. And there is plenty of real estate left to conquer. These restatements are not dire, and if the news slams the stock, it would be a great opportunity to pick up a steady grower at a value price.

Have you ever eaten at a P.F. Chang's? What did you think? How do Asian foods stack up when it comes to healthier eating? What is MSG exactly? All this and more -- in the Health and Nutrition discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz has enjoyed his meals at his local P.F. Chang's, but he does not own shares in any companies mentioned in this story.