Last October, when I ordered up P.F. Chang's (NASDAQ:PFCB) on my investment menu, investors were dropping the stock like a stale egg roll. Crack open its latest results, and it still looks gloomy.
Earnings of $0.36 per share from sales of $228.6 million were in line with consensus analyst estimates for the first quarter, but that certainly isn't bringing optimism to the stock. That's because meeting analyst estimates is a minimum expectation for a growth story like P.F. Chang's. A stock trading at roughly 33 times anticipated full-year earnings is priced for solid performance, and the numbers -- 17.7% top-line growth, with 1.8% Bistro comps and 0.2% Pei Wei comps, topped off by a 10% drop in EPS -- hardly reflect that. In the quarterly earnings conference call, management admitted that both Bistro and Pei Wei fell short of internal estimates.
One challenge is underperformance from some of P.F. Chang's newer sites. Unfortunately, it doesn't seem as though management has pinpointed the culprit. During the call, one analyst asked why the new Pei Wei units were not living up to expectations. Management indicated that when these restaurants opened, sales were well below anticipated levels, but they have since been "trending up." It acknowledged that there were no marketing strategies during the openings -- initial advertising is not something the restaurant chain historically uses. Leadership conceded that with one site, it has resorted to a direct mail drop to create greater awareness in the community.
So is site selection the problem? Again, management at P.F. Chang's is not willing to declare just yet that recent new openings were established on "bad sites." However, this comment must be taken in light of earlier remarks in which management suggested that "cannibalization" -- when new sites eat away at the sales of established units nearby -- is partially to blame for underperformance.
Beyond customer traffic issues, the company is also being challenged on its margins. While cost of sales as a percentage of total revenue remained relatively flat year over year as P.F. Chang's benefited from softer poultry prices, operating margins were a different story. Increased labor costs as a percentage of total revenue are putting a strain on profitability: This metric moved to 33.6% from 32.7% in the year-ago period because of a tightening in the labor market, as well as state-mandated wage increases.
P.F. Chang's is an attractive concept that should provide solid long-term value for shareholders. However, the "should" depends on leadership that can effectively manage and maximize this growth story. With plans to open 19 Bistro and 30 Pei Wei sites this year, investors will want to see whether P.F. Chang's has figured out a way to get the most out of these new openings.
Take a bite into related Foolishness:
- Take a Fast and Foolish glance at Cheesecake Factory (NASDAQ:CAKE).
- Ruth's Chris Steak House (NASDAQ:RUTH) is looking pretty tasty.
- And Ruby Tuesday (NYSE:RI) is producing polished results.
Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
