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8-K - FORM 8-K - P F CHANGS CHINA BISTRO INC | c04040e8vk.htm |
EX-99.1 - EXHIBIT 99.1 - P F CHANGS CHINA BISTRO INC | c04040exv99w1.htm |
Exhibit 99.2
CORPORATE PARTICIPANTS
Robert Vivian
|
P.F. Changs China Bistro, Inc. co-CEO | |
Rick Federico
|
P.F. Changs China Bistro, Inc. Chairman & co-CEO | |
Mark Mumford
|
P.F. Changs China Bistro, Inc. CFO | |
CONFERENCE CALL PARTICIPANTS | ||
Destin Tompkins
|
Morgan Keegan & Co., Inc. Analyst | |
David Tarantino
|
Robert W. Baird & Company, Inc. Analyst | |
John Glass
|
Morgan Stanley Analyst | |
Sharon Zackfia
|
William Blair & Company Analyst | |
Lawrence Miller
|
RBC Capital Markets Analyst | |
Brad Ludington
|
KeyBanc Capital Markets Analyst | |
Matthew DiFrisco
|
Oppenheimer & Co. Analyst | |
Howard Penney
|
Analyst | |
Keith Siegner
|
Credit Suisse Analyst | |
Nicole Miller
|
Piper Jaffray & Co. Analyst | |
Jeffrey Bernstein
|
Barclays Capital Analyst | |
John Ivankoe
|
JPMorgan Chase & Co. Analyst | |
Paul Westra
|
Cowen and Company Analyst | |
Bryan Elliott
|
Raymond James & Associates Analyst | |
Greg Ruedy
|
Stephens Inc. Analyst | |
Mitchell Speiser
|
Buckingham Research Group Analyst | |
Peter Soleil
|
Kelsey Advisory Group Analyst | |
Greg Schraeder
|
Wisco Research Analyst |
PRESENTATION
Operator
Good afternoon. Welcome to the P.F. Changs China Bistro second quarter 2010 earnings release
conference call. Your lines have been placed on a listen-only until the question-and-answer session
of the conference. (Operator Instructions) Todays call is being recorded. If you have objections,
you may disconnect at this time. I would now like to turn the call over to Mr. Bert Vivian,
co-Chief Executive Officer. Please go ahead, sir.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Good morning, everyone. Thanks for joining us today. Rick Federico, our Chairman and co-CEO; as
well as Mark Mumford, our Chief Financial Officer are with me today and we will be available in
just a few minutes for your questions.
A number of our comments today will be forward-looking in nature and as such will include risks and
uncertainties. We recommend that all investors thoroughly review our quarterly and annual filings
with the SEC before taking a financial position in our Company. We intend to file our 10-Q for the
second quarter later today.
One of the concerns coming out of the first quarter earnings call was how rapidly we would be able
to normalize the Bistro margins after the impact of our happy hour rollout. We had estimated those
first quarter inefficiencies to be around 180 basis points. About 100 bps in labor and about 80 bps
in cost of sales. While there was some continued pressure early in the quarter, we did see
sequential cost improvement each month. Overall, for the second quarter, we saw labor improve 100
bps and cost of sales 110 bps compared to the first quarter.
A small menu price increase in May helped, but the majority of the improvement came from the focus of the operating teams as well as the maturation of the happy hour program. Bistro comps have shown sequential improvement since the summer of last year. We have now experienced positive guest traffic for the past five months. Clearly, the tone of the business is improving at the Bistro.
A small menu price increase in May helped, but the majority of the improvement came from the focus of the operating teams as well as the maturation of the happy hour program. Bistro comps have shown sequential improvement since the summer of last year. We have now experienced positive guest traffic for the past five months. Clearly, the tone of the business is improving at the Bistro.
Pei Wei continued to execute at a high level during the second quarter as we leveraged a positive
top line into higher restaurant operating margins and returns on invested capital. We have
generated positive traffic and comps at Pei Wei for each of the last ten months. We are making
efforts to prime the Pei Wei development pipeline and anticipate putting more capital to work in
the future. We have opened one restaurant so far this year, and were opening our first location in
Chicago next month. That will be the extent of our 2010 development at Pei Wei. Our goal for next
year is ten to 15 new restaurants.
Our international business and frozen food venture is housed in something we call global brands.
This group generated $1.3 million in revenue in the second quarter with about half of that amount
coming from the recognition of territory origination fees, and the balance coming from
international and retail royalties. As you saw in our press release, we have signed an agreement
with International Restaurant Services for the development of the Bistro in Puerto Rico. This marks
our fourth international agreement. There are currently four international restaurants opened. Two
each in Mexico and the Middle East. We expect to see an additional three to four restaurants open
in the back half of the year.
At some point in time, we are hopeful that the revenue stream from our Unilever partnership will be
significant enough to warrant separate disclosure. At this point in time, it is not; therefore, we
are not. I will say that both parties are extremely pleased with the early reception of our grocery
product.
During the quarter, we paid off the remainder of the $40 million in outstanding borrowings on our
credit line. We continue to believe that we will generate between $130 million and $140 million in
cash from operations and about $100 million in free cash flow this year. So far, we have spent $11
million in share repurchases and expect to spend a total of about $40 million for the year.
One last comment before we open up the call for questions. With respect to 2010, we have
consistently said that the second half of the year would be better than the first half. In order to
achieve our earnings target for the year, we must produce a significant improvement over last
years results. There is a laundry list of expense risks that could trip us up; however, we like
the positioning and the sales momentum of both of our concepts. If our sales momentum continues, we
stand a reasonable chance of achieving roughly $2.00 in earnings. If sales waffle in the back half
of the year, we will not get there. With that, Sharon, lets open up the call for questions.
QUESTION AND ANSWER
Operator
Thank you. We will begin the question-and-answer session. (Operator Instructions) Our first
question comes from Destin Tompkins of Morgan Keegan & Company. Go ahead, sir, your line is open.
Destin Tompkins Morgan Keegan & Co., Inc. Analyst
Thank you. I guess my first question is maybe more of a high-level question, maybe for Rick, around
some of the menu strategy efforts or some of the things you may be looking at around the menu. And,
I guess, specifically, you have got nutritional information that is going to be required to be
provided next yearearly next year. And I am curious kind of what your thoughts are there. And
then also, around the happy hour program, we had recently seen some new menu items that you guys
were testing that were similar to a sushi-type product. And I am just curious, kind of what your
thoughts are around the evolution of the happy hour program as well.
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Sure, let me back up a little bit. If you go to about a year ago, we went out toand did some
consumer testing to evaluate what the kind of the boundaries are from a culinary development
perspective in the minds of our guests. We have always had sort of this internal expectation of
what the Bistro menu could be and what it has been, and we have been almost exclusively focused on
wok-style cooking and the regions of China.
What we found from the research, basically, was that the guests gave us veryit was very, very
confident in our culinary capabilities, but they gave us much more latitude than we were giving
ourselves. And what we did as part of that process was we put about 20 different menu platforms and
menu conceptsindividual menu item concepts in front of the guests ranging from very classic
Chinese, through other Asian countries, through more lunch style items and things that might be
accepted more in a happy hour setting. Again, we came back with much more latitude and much more
flexibility than we had ever internally given ourselves.
Armed with that, we identified what we think are three buckets to go after some new innovation and
some new product development, but with some very clear expectations in terms of what testing would
look like and what success would look like. And so those buckets have landed in the happy hour
bucket, that 3:00 to 6:00 time frame, the lunch bucket. Classically, or up until now, we have
served basically the same menu lunch and dinner and so we have the opportunity to evaluate more
lunch style. And then the third category would be that sort of better-for-you nutritional, an
opportunity to take advantage of what has always been viewed as a trend; but not necessarily from a
customer-ordering perspective has been high on the product mix list.
We started withagain, with sort of multiple activities going on. We took our internal culinary
team and we went out and we hired two external consultant groups. One to focus on lunch and one to
focus on happy hour and nutritional, and paired them with our internal team and Philip Chang, who
continues to do a lot of work with the Company. From a happy hour perspective, it was the one that
came through the pipeline first. We had basically identified four categories that could potentially
complement the existing menu items that are on our happy hour menu. Things like our crispy green
beans and our chicken lettuce wrap; and again, going back to the fact that we can expand a little
bit beyond sort of traditional Chinese and get a little bit more innovative.
The four categories that are being tested. One is a Mama Nori, which is a soy-wrapped, almost like
a hand-wrapped sushi style. The second would be an expanded Dim Sum offering. The third would be a
Koji Korean taco-like product and the fourth would be a flat bread. We have introduced two of those
four into Kansas City, the Mama Nori and the flat breads. And the intent there is one, our
consultant was up there. Two, weve got a really good location on the plaza in Kansas City.
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And what we wanted to do was to identify all of the operational issues and challenges that might
present itself by a very new menu rollout or a product rollout. Our intent is to continue to run
the test there in Kansas City. We willwe are bringing our learnings from Kansas City and were
going pair that with the Dim Sum and the Koji taco products, and we will expand the test in Phoenix
at a date that is not yet firm, but its probably somewhere latter part of summer, early part of
fall.
And that expanded test, again, is designed to give us a couple of things. One, is to hopefully
eliminate or at least better identify what some of the financial implications from a cost
perspective might be so that were not sitting in Q3 next year explaining why Q1 was up because of
the rollout of additional happy hour stuff, well be able to get that to you more in advance. But
two, really to start to dig into sort of consumer acceptance and whether this can move the needle
during that period of time. And then more importantly to development strategies that start to push
that happy hour consumer, that 3:00 to 6:00, if we can figure out ways to entice them to stay for
dinner, so to speak.
So, we will run the test in the Phoenix marketplace. We will spend some money against that. We will
invest a little bit of marketing dollars. And again, its part of our marketing learning process.
One, to see if we can have a positive impact during that time frame. And then again, more
importantly to see if we can move guests from point A to point B.
I think the second part of your question was the nutritional; and again, it sort of dove tails into
that same philosophy. We believe there is an opportunity to develop some very specific items that
carry lower calories and lower sodium. As you know, a lot of our menu is soy sauce based, which
inherently has relatively high sodium content. And our expectation is by the back half of this year
that we will have a nice complement of items that we can blend into our menu that would not only
complement the menu but complement the nutritional requirements the guest might be looking for.
Destin Tompkins Morgan Keegan & Co., Inc. Analyst
Thank you, that is very helpful. Two quick follow-ups to that. I guess in terms of the happy hour
program. Can you speak to the success of it and the incremental traffic you think you might be
picking up? And then also, it sounds like from a cost perspective, you obviously feel like you guys
have a better handle on that. Is there still rooma lot of room? What kind of magnitude in terms
of room for improvement do you see from here in terms of being able to achieve better margins
potentially?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Hey, Destin, this is Bert. I think that we are very pleased with what we have seen at happy hour.
Obviously, well-documented, well-discussed the fact that we invested early on in the process and we
have been kind of weening ourself off of some of those inefficiencies. At this point in time, I
will tell you that were operating fairly efficiently with respect to happy hour. I dont expect
any significant improvement with respect to the happy hour piece of our business on a go-forward
basis in terms of cost savings.
But again, theclearly we have seen, as I mentioned in my comments, we have seen continued traffic
growth of the Bistro, and surely, a portion of that is due to our happy hour activity and the fact
that when people come in and hopefully have a good experience at happy hour, theyre coming back
for lunch and dinner.
Destin Tompkins Morgan Keegan & Co., Inc. Analyst
Great, lastly, one modeling question. Mark, it seemed like the average weekly sales were a little
softer than the same-store sales trends. There seemed to be a bigger gap than there has been the
last couple of quarters. Was there an issue with the Fourth of July shift or anything that you can
explain that with?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Yes. Just to remind everyone first, for comp purposes, we compare alike weeks for both years. For
example, like you mentioned, the Fourth of July week, we compare that to the same week last year.
The calculation for average weekly sales, that is pure math. We take the sales during the quarter
and we divide that by the number of sales weeks.
Due to the 53rd week that we had last year, the fiscal calendar shifted on us. Last year, July
Fourth fell in Q3, this year it fell in Q2. The Fourth of July week, just to remind everyone, is
not favorable to our topline. Thus, a decrease in our average weekly sales as we compare to the
prior year. In addition, the 10 stores are not in the comp base performed a little softer. That
pulled it down a little bit, but the big driver is the Fourth of July calendar shift.
And we do expect that to shift for us, or to reverse for us in Q3. We have already taken a look at
it, and it looks likejust like we expected that has reversed.
Destin Tompkins Morgan Keegan & Co., Inc. Analyst
Thank you.
Operator
Our next question comes from David Tarantino of Robert W. Baird. Go ahead, your line is open.
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David Tarantino Robert W. Baird & Company, Inc. Analyst
Good morning. I have a question, Bert, on your guidance and you mentioned that the second half
implied EPS target could be reached if your topline momentum continues and I just wanted to
understand or clarify that comment. What is meant by topline momentum continuing? Is it comps at
the run rate you saw sort of in May-June or do you need further improvement to start to get the
leverage that you need to hit that target?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
David, I think weve said in the past its our expectations for the back half of the year was that
the Bistro would actually see positive average weekly sales, modest but nonetheless positive for
the entire back half of the year. We certainly need to achieve that. Rick mentioned some of the
things that are going on from a food perspective at the Bistro. Were going have the number of
tests going on in the back half. That is another way of saying there will be parts of our system
that may not be as efficient as others. So there is going to be a little sloppiness in certain
parts of our system as we test certain things.
There will also be some marketing spend in the back half of the year against some of these
initiatives. So, when I say that our sales momentum needs to continue, we certainly need to be at
our expected levels that we thought we were going need all year long. And it would be hopeful to
have a little bit more than that in order to cover some of the things that we think we are going
incur in the back half of the year. It may not be quite as discrete and refined as you would like,
but that is probably as far as Im going to go with it.
David Tarantino Robert W. Baird & Company, Inc. Analyst
Okay, that is helpful. And then a question on Pei Wei trends. Just trying to reconcile the
same-stores sales momentum youre seeing there. It looked like it slowed down a little bit as you
got into the second quarter. And I am just wondering if there were any marketing related shifts or
anything that might have affected the comparison for that brand?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
On a general basis, one of the things we internally try to avoid is trying to match marketing
withfrom a time perspective versus putting it around the initiative that it makes sense. We dont
spend a lot of time thinking about what we marketed last year during what time frame in comparison
to this year. We did haveor we do have some marketing coming up on our next LTO in October, which
would be the launch of our Thai River noodle product. And again, we will tend to look at our
marketing spend and its impact and implications over broader periods than just a quarter-to-quarter
basis.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
And, David, this is Mark. We did take a look at it. Just to try to figure out if there was
something either marketing related or another activity that may explain it. Its difficult to be
able to predict what the consumer is going to do. What we can tell you is its really isolated in
our top-three markets. Dallas, Phoenix, and Houston. All the other markets were pretty consistent
throughout the quarter. So we werent able to explain it, but were able to pinpoint where it was.
David Tarantino Robert W. Baird & Company, Inc. Analyst
Okay, that is helpful. Thanks a lot.
Operator
Our next question comes from John Glass of Morgan Stanley. Go ahead, sir, your line is open.
John Glass Morgan Stanley Analyst
Thanks. First, if we could just go back to the Bistro margin for a moment. Is it possible to talk
about where margins were in a snapshot in time, for example, in June, once you fixed the labor
balance of happy hour, but also you had a 2% price increase. So are theywhere are they now? And
where do you expect them, in other words, to trend in the back half of the year?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
As Bert mentioned, we saw sequential improvement throughout the quarter both in cost of sales as
well as labor. Cost of sales at the Bistro improved 100 basis points sequentially, and benefited
from product mix shift. We saw an increase in the penetration of dinner for two that is primarily
chicken-related, which has a higher margin. That helped us in our cost of sales. You mentioned
price, that was halfway through the quarter and that helped us as well.
And we burned through some of the more expensive wok oil. We were using some of the less expensive
wok oil. And on a sequential basis, if you think about produce, our yield is not as good in Q1 as
it is in Q2, so we had a little bit of help from that as well. Bert mentioned the labor
improvements that the operators had gone through to get that labor back in line. Part of it was
maturation of the happy hour program, but some scheduling efficiencies that we put in place as well
helped us out. So, from a prime margin perspective, we thinkif you look at June, that we kind of
normalized and were going to carry that forward throughout the rest of the year.
We do see some pressure, though, on some of the fixed expenses. Both concepts, as you probably
noticed, had pretty significant increases in fixed expenses. So Bistro had about 60 basis points,
40 of it in operating expenses. Half of that 40 was due to marketing spend. The remainder was due
to higher utilities, specifically, water and electricity. Occupancy expense was also up 20 basis
points. That was due to increase in property taxes, as well as general liability insurance. We
typically see higher liability claims both frequency as well as severity during an economic
downturns. So no surprise there.
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Pei Wei saw kind of the same pressures on fixed expenses and kind of the same reasons. 40 basis
points in operating expenses, 20 basis points in occupancy. They also saw a little bit of pressure
and depreciation expenses. They had rolled off some assets before they were fully depreciated.
The majority of those fixed expenses we have modeled into our forecast are going to stay with us as
we look at the back half of the year. So we are going to have a little bit of pressure from those
fixed expenses.
John Glass Morgan Stanley Analyst
Where are Bistro margins today, though, like the month of June? You can share that with us?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Like Bert mentioned in the call, we improved sequentially. And by the time we got to June, our
margins are normalized and that is what we carried through the remainder of the year.
John Glass Morgan Stanley Analyst
Okay, but you dont want to talk about the absolute number is what Im asking?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Were not going talk specifically about margin percentages.
John Glass Morgan Stanley Analyst
Okay. And then the global brands number, a $1.3 million in the quarter. I know you dont want to
parse it out into pieces, but what did you expect the year to be initially for the global brands
total revenue, and what do you think its going to contribute now? Is it a higher number than you
had started the year thinking about?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Yes. What we originally said on global brands, last year, we had about $0.08 of pressure on the
EPS. Our original guidance that we gave you this year said that we were probably going to cut that
in half. Were doing a little bit better than that, soand most of that, obviously, is going to be
attributable to revenue. So were probably somewhere in the $0.01 to $0.02 range of pressure that
were going to see on global brands.
John Glass Morgan Stanley Analyst
Great, and then just one more on the margins. You talked about flat margins, I think, on a
consolidated basis with a $2.00 number. Are you including the denominator in thatthe global brand
revenue when you calculate restaurant margins or are you just talking about restaurant revenues
against restaurant cost?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
That is going to be all in.
John Glass Morgan Stanley Analyst
So that means the improvement in the margins in partmaybe in large part has to do with a better
global revenueglobal brands revenue?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Yes.
John Glass Morgan Stanley Analyst
Is that correct?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
That is a piece of it. Yes.
John Glass Morgan Stanley Analyst
Okay. All right, thank you.
Operator
Our next question comes from Sharon Zackfia of William Blair. Go ahead, maam, your line is open.
Sharon Zackfia William Blair & Company Analyst
Hi. I have two quick questions. On the bistro, Im curious about your appetite for accelerating
that concept in 2011 in terms of development? And then I had a separate question on development for
Pei Wei.
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
From the Bistro perspective, we continue to have an aggressive appetite for development. The
challenge that we have there is there isin the development community, they dont have as large an
appetite as we would like them to have. Theyre still working through some of the broader economic
considerations. The numbers of opportunities that we are presented are significantly less in
2009-2010, and you got to fast forward about 18 months for a development cycle. So were working
through being very selective around our normal parameters, but with far less opportunity right now.
So, as we look into next year, were probably in the four to six new Bistros for 2011.
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Sharon Zackfia William Blair & Company Analyst
Okay. And then separately on Pei Wei, obviously, youre opening in my home court in Chicago so I
probably know a little bit more than I should. But can you give us your thoughts about that Logan
Square location, which is the first Pei Wei here? Kind of what the thought process was in choosing
that neighborhood. And then how do you go about building awareness in a city like Chicago, and how
quickly do you plan on adding more locations, and where do you think you need to kind of grow to,
to get that brand halo in the city?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
A couple of good questions in well is their, Sharon. And youre right, you do have a little bit of
an advantage by living in the marketplace. And I think really embedded in there, there are two
questions. One, is sort of the sequential nature of the development of the marketplace in terms of
if you had aone bullet to fire would the Ellison and Logan location be the very first one that
you would do. The answer is probably not.
But in a sequence of laying the market out and going over the next three or four years, I would
expect Pei Wei to develop somewhere between 7 and 15 locations in the Chicago marketplace. With a
little bit more aggressive focus, would the Ellison and Logan location be one that you would pull
the trig on; and the answer there is simply, yes. So it became the first one because one, it was
identified as a good market; two, it became the first one because it happened to happen first. What
we like about the site; and again, our thought process around new market penetration is a couple of
things.
One, is weve got enough properties in the ground now where we can build a success model in terms
of what the demographic should look like, what the co-tenancy should look like, what accessibility
and visibility and all the characteristics that you would take into account when developing any
restaurant location, that Logan location stacked up incredibly well in pretty much all categories.
And some of the things that we liked, in particular, is the fact that it did happen to be new
space, which allowed us to put our full image into the marketplace first, as how Pei Wei looks and
functions. Its got really co-tenancy with the Target and the Pot Belly and the Panera all being
well above system average. And for an urban location, it actually has parking spaces, which really
helps facilitate the Pei Wei business because 40% of our business is takeout. Density penetration,
income, office workers are all well-above many of our most successful restaurants.
Again, it may not be sequentially the first you would fire, but its clearly one we would want to
do. We do have two other deals that are inked and in development or under construction. One, is a
more typical suburbanactually the next two are actually more typical suburban locations. One out
in Willowbrook, which is a western suburb as you know; and then the other ones over in the
Arlington Heights, sort of Randhurst area. And we continue to negotiate work on multiple other
locations in the Chicago marketplace.
From an awareness building standpoint, we will be much more aggressive in Chicago in terms of our
public relations activities, our marketing activities, and our introduction of the brand. We think
that, again, and it can beit can and will be very localized from an introduction to the local
community, you have gotwithin three miles of that location, youve got 608,000 people with an
average income of about $80,000 a year. So there is plenty of opportunity to stay close to home and
put the brand in front of people in a relatively aggressive manner.
Were also going to be very interested in sort of broader public relations activities, because our
expectation is we will have multiple Pei Wei locations there in relatively short order. Its going
to be a combination of local marketing, as well as starting to build a little bit of brand
awareness.
Sharon Zackfia William Blair & Company Analyst
Okay. And then lastly, Bert, you threw out a lot of potential and negative wild cards there. Is
there something that we should be worried about that youre seeing in July, or are you just trying
to throw out all the caveats?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Sharon, with respect to July, I am fat, dum, and happy. I just worry about August through December,
and in particular, September. September is always a tough month and so to the extent that we have
high expectations for the third quarter, I always worry about September. So far, were doing fine
in July. And wereif anything, were a little bit ahead of our forecast from sales perspective.
But again, there is a lots of goblins under the bed. Some of our own doing, some of kind of a macro
standpoint.
I think its appropriate for people to be cautious. Ive said before that our single point earnings
estimate, if we probably practiced a little more prudence, wed give you a range so we could hide
behind that range, but we dont. $2.00 is a tough number for us, and I think it represents the high
end of what is going to happen. So I will say it again, if anyone thinks were going to make more
than $2.00, you should probably dissuade yourself from that.
But I like our chances. There is going to be some risks in the back half of the year. I also think
that there will probably be some opportunities for us to do a little better than maybe our internal
expectations. Its a mixed bag, were excited about the opportunity in the back six months, and
cant wait to see how it pans out.
Sharon Zackfia William Blair & Company Analyst
All right, great. Thanks.
Operator
Our next question comes from Larry Miller of RBC. Go ahead, your line is open.
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Lawrence Miller RBC Capital Markets Analyst
Thanks. I just wanted to follow-up. Maybe, Mark, the way you can answer this, when you say
normalized margins on happy hour in June, should we be interpreting that happy hour program as
generally lower margin than, obviously, the regular Bistro margin would be? And maybe you could
give us parameters on that just order of magnitude at least?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
I think what Bert said is the happy hour program allows us to build momentum in the other day
parts, and I think we saw that happening in Q2. The margin on happy hour were comfortable with. I
think as we rolled out the program, we wanted to make sure that we did a good job of having it well
staffed. We probably did a very good job of that, and I think when we look at our Q1 margin, it was
reflected in that. And as the program matured and we got better labor scheduling and we started to
figure out exactly how to service that piece of the business, we saw those operating margins come
back to us. And that didnt happen, obviously, in the first period of the quarter. That happened
throughout the quarter. And by the time that we got to period six, we were at a run rate where we
said, you know what, this is where we need to be. So that was my comment that on a normalized
margin we got back to where we needed to go.
Lawrence Miller RBC Capital Markets Analyst
Okay, great. Maybe you could give us a sense of how sales mix in happy hour has progressed since
the beginning of the year? And just one more question on G&A. I think it was down in dollars for
the second quarter. How should we think about the G&A run rate? Thanks.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Ill answer the first one first here. Were not going to give us specifics on happy hour. Happy
hour falls into part of our lunch and part of our dinner. What we can tell you is that we achieved
improvement in all of our day parts during Q2 versus last year. Lunch overall was positive again
for us on both weekdays and weekends, but with a stronger improvement during the week. And we
believe that improvement during the week also is reflective of our larger ticket. So we start to
see some of that T&E spend come back to us.
Our weekday dinner also improved pretty significantly. That weekday dinner, once again, could be
related to that T&Ethat business spend. Our biggest improvement during the quarter actually came
from the dinner weekend. We saw a sequential improvement from Q1 that was pretty significant and it
almost got it back to positive. And that is really reflective of the large parties as we begin to
see those large parties come back into our restaurant.
Operator
Our next question comes from Brad Ludington of KeyBanc. Go ahead, sir, your line is open.
Brad Ludington KeyBanc Capital Markets Analyst
Thank you, I just wanted to ask a question on your guidance. Its pretty much in line with the
previous guidance, but there was one thing left out. On the first quarter, it said that you were
going to work on improving the average weekly sales at the Bistro by pulling back onhaving fewer
sales discounts. So that was not included this time around. Is that because that is already started
or because youre planning on keeping some of the discounts at this point?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Brad, this is Bert. To the extent that we were going to nip a little bit of the discounting and
above, we have already done that. So it wasnt necessary to mention it again.
Brad Ludington KeyBanc Capital Markets Analyst
Okay. Its not a change in strategy, its just already done?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Right.
Brad Ludington KeyBanc Capital Markets Analyst
Okay, good. And then I missed, Im sorry, my phone cut out there. I heard you talking about the day
parts and strength in the weekend dinner. But did you say that the weekdays were strengthening as
well?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Yes. We saw improvement weekday lunch as well as weekday dinner.
Brad Ludington KeyBanc Capital Markets Analyst
Okay. That is good for me. Thank you.
Operator
Our next question comes from Matt DiFrisco with Oppenheimer. Go ahead, your line is open.
Matthew DiFrisco Oppenheimer & Co. Analyst
Thank you. Mark, I think it was you that referenced the Pei Wei markets. Dallas, Phoenix, and
Houston in June. Should we just look at that then as that is targeted to June, or is that still
somewhat of aare those three markets that are somewhat on the lower end of the basket of your
portfolio of stores for Pei Wei?
7
Mark Mumford P.F. Changs China Bistro, Inc. CFO
No, they represent one-third of our basket. As they go, so will Pei Wei go. And were not
certainthe positive in it is, we saw positive traffic in all three periods during the quarter. It
just trailed off a little bit in May and June. And all we did was try to dive in and see if we
could find out some reasons. We really didnt see a lot. Like I said, Its difficult to predict
consumer spend. All we could do is pinpoint where it was coming from.
Matthew DiFrisco Oppenheimer & Co. Analyst
Great. Did you maybe look at those as markets where the penetration level for Pei Wei is very high?
So maybe there is greater overlap with Bistro, do you think it could beis it anything overlapping
with the happy hour introduction?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
We took some deep dives, we did not see any correlation there.
Matthew DiFrisco Oppenheimer & Co. Analyst
Okay. Can you justa little bit more on the happy hour. Anywhat does your test tell you the
seasonality of happy hour? Should we expect it to be as much of an incremental driver as we get
into the colder months?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Matt, this is Bert. I dont about you personally, but I tend to drink 12 months out of the year. I
am not so sure were going to see any huge seasonal shift in our happy hour activity.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
What I can tell you is if you look at sequentially from Q1 to Q2, it continued to improve. The
percentage of sales improved, as well as the number of checks improved from Q1 to Q2.
Matthew DiFrisco Oppenheimer & Co. Analyst
Okay and then just the last question. As far as in other calls, you also talked about somewhat of
amaybe Im using this word and you didnt use it, but capacity gains potentially by weatherizing
some of the patios, looking at the stores, and trying to get a little bit more creative on trying
to get better utilization of some of those things like the patio. Is there anythingcan you talk
about that asis that something that could be meaningful and incremental in a year-over-year basis
on what you might have added over the last 12 months or what you plan to add?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Its certainly not going to bewe have only done it in a couple of stores. We are currently
evaluating the impact of that. Its certainly not as easy as one might think. There is a lot
ofthe landlord is not going to let you do it everywhere. Theres a lot of hurdles that you have
to cross just to put it in. So were going to let this settle. Were going to see what impact that
it had before we go further, but it does not have a material impact to us in Q2, nor will it have a
material impact for the year.
Matthew DiFrisco Oppenheimer & Co. Analyst
Okay. And then just the last question, with respect to looking at your commodity cost, is there
anything out there that you are seeing that we should start anticipating, maybe not being as
favorable into 2011 that you might have coming off contracts soon?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Not really. Just remind everyone, we lock in our contracts for our protein, rice, and wok oil. For
2010, as weve said before, were running slightly favorable on beef and rice and shrimp and
chicken is flat. We have been more aggressive than locking in prices on a longer-term and getting
ahead of it a little bit. Weve got 80% of our chicken locked in, rice is locked in through
September of next year.
The majority of our seafood is locked in, including shrimp. We had a couple of questions lately
about the impact of shrimp because of the Gulf BP issue. Just to remind everyone, we dont source
directly any of our shrimp from the Gulf; therefore, we dont have a direct supply or price issue
there. But about 12% of the shrimp does come out of the Gulf, so we have seen a little bit of price
increases there. But like I said, we have contracted through 2011, and it is pretty similar to the
price that we had in 2010.
What were currently looking at and looking for opportunities to lock in for 2011 are beef and
pork, and when we think its the right time and opportunity well do that as well.
Matthew DiFrisco Oppenheimer & Co. Analyst
Great. Thank you.
Operator
Our next question comes from Howard Penney of Hedgeye. Go ahead, sir, your line is open.
Howard Penney Analyst
Thanks very much. Bert, in a couple of years back you wereI guess you could say you had a laundry
list of reasons why you thought consumer spending was going down, and your sales sort of headed
down before everybody else. And it looks like, at least from the commentary you provided today in
terms of the dinner weekend and the weekday lunch that things are turning up. I was wondering if
you would care to share some of the macrofactors, whether it be credit trends, which really arent
improving or confidence, which isnt really improving, as to why you might be seeing
the kinds of things youre doing. I understand that the issues youre doing with happy hour and all
that, but I was just curious there might be some macrofactors that you see that might be
contributing to the improvement in your sales.
8
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Howard, Im not that smart, quite frankly. I think theres a number of things afoot that from a
macrostandpoint, that might be giving us a little bit of benefit. We have talked about business
spin, or dissecting our business into business spend and social spend. We thought that there would
be an increased level of business spend this year versus 09. So far, everything that we look at;
again, its a piece of data here and a piece of date there, but it seems to indicate that that is
the case.
As weve thought about this year, we made the presumption that if business spend improves, that the
consumer or social spend would follow, and I think as Mark indicated, were beginning to see some
traction in terms of weekend dinner. Again, that tends to be more of the social spend than the
business spend. So ultimately, we never know exactly why people come to our restaurant. Try as we
might to figure it out.
I will say that as we look at our markets and where were geographically located; and again, we
have a great deal of exposure to California, Nevada, Arizona areas that were hard hit during the
recession. As those markets begin to improve, you will see that reflected in our results. And
perhaps that is why we dipped down a little bit earlier than other folks because of our
concentration in those areas, and perhaps that is why were beginning to distance ourselves from
some of the competition in terms of results, simply because those areas are beginning to at least
flatten out if not improve. I think that from an economic standpoint, we continue to believe its
going to be a tepid recovery.
There will be 50 starts along the way and ultimately, for what its worth, I think this recovery
will be shallower in the casual dining space thanand the peak in this cycle will not be as high
as in previous cycles. But again, thats my opinion and its worth about $0.25 at this point. So I
dont know if I can add any more color than that.
Howard Penney Analyst
On the margin, is the rate of change in those markets that you talk about is it fastis the
improvement better than the other markets?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
In a couple of those markets, yes. Not all of those three markets, but in two of the three, yes.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
And we saw improvement across all the geographies. All but three state showed sequential
improvement from Q1. So it was a pretty broad type of recovery from Q1 to Q2.
Howard Penney Analyst
And those states were?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Now, Howard.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Give him a little bit.
Howard Penney Analyst
Thank you.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
You bet.
Operator
Our next question comes from Keith Siegner of Credit Suisse. Go ahead, sir, your line is open.
Keith Siegner Credit Suisse Analyst
Thanks, I just want to ask a follow-up question on the development outlook for Pei Wei. You gave us
a bit of a detail about how many units for next year and some of the thoughts around of the
decisions aroundparticularly around Chicago, but could you talk a little bit about the real
estate outlook? Whats built into this 10 to 15 that youre looking for ? How do you perceive that
market? Where that development is being allocated, is it adjacent markets, is it mostly markets
maybe like Chicago, and what is the return on capital thats currently in your outlook for those 10
to 15 units? Any thoughts around that or other factors that actually contributed to this? Just a
little more detail behind the outlook would be
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
As we think about the development opportunities for Pei Wei, we really, again, put it in a couple
different buckets. One, is to be opportunistic for A+ opportunities in markets where we are already
deeply penetrated. So that would be the Phoenix, the Dallas, the Houston and to some degree
Southern California marketplace. Anymore penetrated there means that we need to be a little bit
more laser-focused in terms of ferreting out opportunities, but should they present themselves, we
would take advantages of those.
9
We have more aggressive and more interesting opportunities in markets where we already have a level
of penetration that we would consider ourselves to be underpenetrated compared to the opportunity.
And so that becomes sort of our primary focus from a real estate perspective. Markets like southern
Florida or the state of Florida, were doing quite a bit of work in the Philadelphia, Washington,
D.C., and sort of the coastal opportunities along the Atlantic coast where we do well, but we just
dont have as many stores as we would like.
We have not changed any of our return expectations. The Pei Wei brand now as a complete class of
stores is hitting our internal targets of around the 30% ROIC. That continues to be the standard by
which we evaluate all real estate, and for as long as were going to this, that will continue to be
the target.
Operator
Our next question comes from Nicole Miller of Piper Jaffray. Go ahead, your line is open.
Nicole Miller Piper Jaffray & Co. Analyst
Good afternoon. Thanks. Can we go back to when you made the GM incentive change compensation? What
I just wanted to understand isreview with us the change in the structure in terms of the base
comp and incentive pay. And then what Im really wondering is, have you see any behavior changes
that have benefited you since you have made the change?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Nicole, this is Bert. Are you referring to the change we made about three or four years ago?
Nicole Miller Piper Jaffray & Co. Analyst
Yes, I guess its been that long. Right out of the minority interest line?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Sure.
Nicole Miller Piper Jaffray & Co. Analyst
Yes.
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Im sorry, I was trying to recollect what you were referring to. The question is what again?
Nicole Miller Piper Jaffray & Co. Analyst
I believeand I believe it was at the GM level. That part I might have wrong, but the change from
a minority interest, to more like of an incentive pay. I dont think the base structure changed at
all, but for your managers. And Im just wondering since youve implemented that because its
moreits tied to different incentives, have you seen them drive their business differently in a
way that has benefited you?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
The change in how our partners at the Bistro are compensated, part of it was a technical change,
but the spirit of it really hasnt. We went from a true partnership-type arrangement to more of an
incentive pay arrangement, but the drivers behind the program are very similar, and the behavior
that were trying to drive is very similar to the old partnership program. So in and of itself, I
could not sayI certainly could not point to anything that has gone on in the business that I
could lay on the doorstep of either one of the programs because they were essentially designed with
the same goal in mind, which was to grow sales and to grow profits each and every year. Obviously,
we havent accomplished that over the last couple of years. So, I think thatIm not so sure I
could lay thatin terms of compensation structure. I think theres more things involved than just
that. Again, the two programs are very, very similar in design, at least, from a theoretical
standpoint and more the goal were trying to achieve.
Nicole Miller Piper Jaffray & Co. Analyst
Okay. Understood. So no big shift there. And then the context around Bistro and the weekday,
whether its lunch or dinner, just this improvement that youre talking about dinner on a weekend,
could you give us a big picture context of where it is today versus where it was? Can itI guess
Im asking can it still grow? Can and should it still grow from here?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Can it still grow from here?
Nicole Miller Piper Jaffray & Co. Analyst
Yes.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
All right. I think we have capacity especially at lunch. I think we have capacity to grow our
business in almost in all of our day parts. We lost quite a few transactions over the last few
years; and so from a capacity standpoint, there is not a day part that we dont have opportunity i,
and you see us continue to do things to try to drive those activities.
Nicole Miller Piper Jaffray & Co. Analyst
Thanks.
10
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Sharon, do we have another question?
Operator
Our next question is from Jeffrey Bernstein from Barclays Capital. Go ahead, sir, your line is
open.
Jeffrey Bernstein Barclays Capital Analyst
Thank you very much. One question for Bert first. In terms of the breakdown of the comp. I know in
the past you have been able to give more color in terms of the average consumer SKU into the low
end, whether it be more for bundling or your lower-priced $10 items or kids meals or things like
that. Are you now seeingbe able to see signs that theresseeing consumers doing less of that,
trading back up to higher-priced items, or like you said, the business versus casual mix? Is there
a read-through in terms of what youre seeing from the average consumer spend within that comp?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Jeff, I think what were seeing, I think what Mark mentioned, is that were beginning to see
improvement in some of the higher ticket, what we call buckets. And with that improvement, while
its the minority in terms of tickets, roughly about, call it 6% to 8% of our tickets are above
$85, they do carry a disproportionate weight when it comes to revenue. So as people come to our
restaurant, and again, part of it is the business spend. Part of it is social spend, where you have
a group of four coming to the restaurant on Saturday evening.
As that portion of our business continues to improve, we will see improvement in our results. Its
fairly simple. The other buckets, we havent seen a lot of movement in terms ofas we look at the
tickets under $15, for example. That continues to be almost 20% of our tickets, but again, it
carries a lesser proportion of our revenue.
Jeffrey Bernstein Barclays Capital Analyst
Okay. And then in terms of the menu price increases you just took, are you seeing any
earlywhether that be pushed back or something like that, I know you guys have run a long period
of time without any real price increases. Just was wondering what youre seeing in terms of
feedback on the price, and perhaps in conjunction with that, Mark, you mentioned commodity basket.
I dont know if you have a kind of broad-based basket expectation in terms of what 2010 is running
and a basket of what 2011 is likely to run?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
What we do realize is there is certainly an art and a science when we take price. And first, let me
say were always very cautious when we take price. And the science of (inaudible) says, hey, the
cost pressures are hurting your operating margin and youre not going to be able to continue. And
the yard is figuring out how to effectually pass that price onto the gas without disrupting too
much of our traffic. We go through a very diligent process to try to achieve that balance between
what we have got to have to try to protect our margin, and what we think the guest is going to be
able to accept and especially in this environment, well alter cost. What we did not see is a drop
in traffic when we took the price in mid-May. Its still early, we could still see a drop in
traffic, but we havent so far. As you mentioned, we havent taken a price in a couple of years.
So, we think the guest certainly accepted that. And I missed the second part of your question? What
was that?
Jeffrey Bernstein Barclays Capital Analyst
In terms of a bucket of commodity costs. I know youve given a lot of the individual components,
but 2010 bucket and percent lock, 2011 total bucket and percent lock?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
I guess Im not following the questions. Oh, are we shifting? Yes, were shifting more on our
protein more toward chicken. Part of that is being driven by the dinner for two, thats more
heavily on the poultry side. So our mix is shifting somewhat to the poultry. And that should help
us in Q2 on the margin.
Jeffrey Bernstein Barclays Capital Analyst
I didnt know if maybe you have a basket forecast that our total basket for commodities including
the beef, the chicken is running down ex this year and sounds like youre a little more fearful
next year. Kind of what that basket is looking like and what the percent is locked in total.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
I got you now. This year, if you look at the total basket, we think its probably 30 to 40 basis
points favorability on the price side. As we look to next year, we havent locked in some of the
proteins yet. We probably will seewere probably not going to get any better. So chicken is
probably going to go up a little bit for us. Just all depends on what happens with the commodity
market and where were able to lock in on beef and on pork. Weve locked in shrimp and some other
seafood at prices that are real similar to what were seeing this year, but its probably at best
going to be flat for 2011.
Jeffrey Bernstein Barclays Capital Analyst
Okay, and if I could ask one last question, I know, Bert, I think you said you were fat, dumb, and
happy with your July sales trends. But in terms ofwith sales trends being the primary driver for
the back half to meet that earnings number, is there a comp sensitivity that you guys have put out
there in terms of being so sensitive to the comp? What a one point of comp is worth at the Bistro
or Pei Wei to annual earnings per share?
11
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Jeff, that all depends on how you achieve that 1% comp is what the flow-through is. If we end up
having to spend a lot of marketing dollars to achieve that, then the flow-through is not quite as
good. So youre right, I am still fat, dumb, and happy 10 minutes later with respect to where we
are in July. But again, I like where were at, I think we have a lot of work to do in the back half
of the year, and things need to break in our favor and continue to break in our favor in terms of
just from a sales perspective. If that happens, then we have a reasonable chance.
Jeffrey Bernstein Barclays Capital Analyst
Great. Thank you very much.
Operator
Our next question comes from Peter Soleil of Kelsey Advisory Group. Go ahead, sir, your line is
open.
Peter Soleil Kelsey Advisory Group Analyst
Great. Thanks. I wonder if you guys can give us a little bit more of an update on the dinner for
two at the Bistro?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Sure. I think what we mentioned earlier is it continues to resonates well with our guests. We saw
an increase in the number and dollarwise of penetration on a sequential basis, Q1 to Q2. So it
continues to do well. The dinner for two, obviously its more heavily weighed to our poultry so it
also helped on the cost of sales. But it continues to do well for us.
Peter Soleil Kelsey Advisory Group Analyst
Is it above the range that it was last quarter in terms of percentage of sales? I think it was like
8% to 10%?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Yes, its running slightly above 10% now.
Peter Soleil Kelsey Advisory Group Analyst
Okay. And then your expectations in terms of free cash, CapEx, and buy back for next year?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
We ended our quarter with $38 million in cash. We used $40 million during the quarter to repay our
debt. We used $9 million in the quarter to repurchase some shares. We got about 204,000 shares
repurchased, average purchase price was $44.34. Our plan for the year remains to purchase $40
million for 2010. We paid our first ever dividend from our Q1 results. We paid it in Q2, used $4
million and we used $12 million in CapEx.
On the cash from operations. So far this year we have usedor we generated $38 million in cash
from operations. That is down from $79 million last year the same period in time. Last year, we saw
the benefit of collecting some higher TI receivable balances, as well as some differences in the
timing of rent. This year, were also feeling the impact of some increases in our cash tax payment.
So far this year, we have made payments of $17 million versus $4 million last year, $4 million of
that $17 million really relates to 2009. As you recall, we overachieved our Q4 expectations so our
estimated tax payment in Q4 was a little underpaid.
So the rest of it really related to lower tax depreciation as the bonus appreciation has rolled
off. We stilland by the way, a lot of this was already anticipated. Last year we hadwe did $160
million in cash from operations. Were forecastingremained our forecast is $130 million to $140
million. To get to that number, we really dont need any help from the working capital accounts. If
you just take the net income plus depreciation and non-cash equity comp, you get to the mid-point
of our range.
Peter Soleil Kelsey Advisory Group Analyst
Great, thanks.
Operator
Our next question comes from John Ivankoe of JPMC. Go ahead, sir, your line is open.
John Ivankoe JPMorgan Chase & Co. Analyst
Thank you, Im actually going to follow-up on that question. Could yougiven what you said of Pei
Wei and P.F. Changs development, just give us the CapEx number for fiscal 11 to the best of your
ability at this point? And I guess the follow-up of that is how much cash do you need to run the
business that stays on the balance sheet? And outside of the dividend, should we assume that all of
your cash will in fact be used to buy back stock longer-term? Might you look at putting on
something else into the business? And just on that context, if you could comment for a couple of
seconds on True Food, I dont recall what the current status of that is.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
A lot of questions. Let me start off with the CapEx for 2011. On average we spend between $3.5
million and $4 million of cash for every Bistro that we open. If we get five open, maybe we spend
$20 million. On the Pei Wei side, its about $800,000 to $850,000 in cash. So if you take 10 to 15,
were probably going to spend another $10 million there. So just on the new store capital, were
probably going to spend somewhere in the neighborhood of $30 million maintenance CapEx, about 1% of
sales were probably going to spend.
And so, youre looking probably in the neighborhood of $40 million to $50 million after you add in
things for shared services. What was your second question? Uses of capital? We havent given you
that. Obviously, our first use of cash is always going to be in our organic growth and our putting
the money to work on new stores. We will continue to pay a dividend, and then well use the
remainder to buy back stock. We dont have any debt left on the balance sheet. So that is really
going to be the uses of our cash as we look to 2011.
12
John Ivankoe JPMorgan Chase & Co. Analyst
And how much cash do you need to leave on the balance sheet?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Werehow much we need and how much we want to keep are two different things. Right now, were
targeting $40 million to $50 million of cash on the balance sheet.
John Ivankoe JPMorgan Chase & Co. Analyst
Okay. And just finally, on True Food or anything else that you might be looking at down the road?
Specifically true food or conceptually to anything else?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
John, this is Bert. We always remain inquisitive about what is going on around us in the industry.
And as Mark mentioned, our first and foremost goal is to put work back into our business. Whether
its in our existing concepts or in new concepts. And obviously, our partnership with Sam Fox and
his team here locally at True Foods is part of that program.
We aretheyre about to open the second restaurant, Ill give them a little plug here. Theyre
about to open their second restaurant in Newport Beach next week. Cant wait to see how that turns
out. Were very early on in this partnership, and were probably a year or plus away from really
sitting down with Sam and his team and understanding whether or not this is something thats going
to be beneficial for P.F. Changs or not on a go-forward basis. Insofar as other businesses, Mr.
Federico always has an eye for new and exciting concepts that might benefit our little portfolio.
Were not in conversations with anyone right now, but we always remain open to ideas.
John Ivankoe JPMorgan Chase & Co. Analyst
Thank you.
Rbert Vivian P.F. Changs China Bistro, Inc. co-CEO
You bet.
Operator
Our next question comes from Paul Westra of Cowen and Company. Go ahead, your line is open.
Paul Westra Cowen and Company Analyst
Thank you, good afternoon. I was wondering if you could actually quantify what the happy hour
impact drag was on Bistro margins compared to the 180 that you mentioned in the first quarter?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Paul, this is Bert. Weve said about all were going to say about happy hour and we talked about it
for six months.
Paul Westra Cowen and Company Analyst
I got it.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
It is where it is now, were happy with the contribution of happy hour. The margin levels and our
team have done a great job of becoming more efficient with respect to the revenue thats being
generated by it. We believe it to be positive. I think our guests believe it to be positive. And
were not going to get any finer in terms of the detail on that.
Paul Westra Cowen and Company Analyst
Okay. Can you quantify the effective menu price increase in total? I never wrote it down, was it
1.5 or was it 2?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Its somewhere between 1% and 2%. In terms of the total impact, of which only a part of that was
felt in the second quarter.
Paul Westra Cowen and Company Analyst
Right. And when you refer to the manufacturing increase impact on margins; and I guess, it was not
as big as the efficiency gains on the happy hour rollout, but it did everything you wanted it to do
I assume. It was fully effective. Is there anything back to the question, any shifting going on?
Are you happy with the margin impact of the present?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Like I said, we didnt really see anywhat youre cautious of is that you see a drop in your
transactions, or that you see guests start to manage their check. We didnt see either one of
those. So were very pleased with the impact and execution of that price.
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Paul Westra Cowen and Company Analyst
Great. My only question, do you expect a second half territory sale showing up in the second
half?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
We recognized most of the territory fees of Global Brands in Q2. Were not going to recognize
anymore territory fees this year.
Paul Westra Cowen and Company Analyst
Great, and then last question more for Rick, I guess. As far as the Pei Wei ramping up its
development, organizationally, are you getting ready or philosophically to get back to eventually a
double-digit unit growth like most chains of yoursof Pei Wei size, 30% of ROIC is typically
achieved and executed.
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
I think the good news is from an operations perspective, this little lull in development over the
last 18 to 24 months has really given the team an opportunity to mature. If you think back to our
comments at the end of 2008, and when we had some pressure at Pei Wei, one of the things that we
identified was how green the team had become. So were well-positioned there. In terms of other
incremental sort ofeither ads that you might anticipate is theres probably one or two additional
headcount that would be required for sourcing and the development of real estate; but other than
that, I think were pretty much good to go.
Paul Westra Cowen and Company Analyst
And how fast do you expect the stores to ramp to margin efficiency as you ramp growth in the
double-digit unit growth, and hopefully, eventually, the double-digit percentage growth?
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Not so sure I caught the beginning part of the question. Mark?
Paul Westra Cowen and Company Analyst
How fast would you get to margin efficiency? Are you running normalized margins of 90 days or is
this a concept that maybe takes a little longer?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
In terms of new stores?
Paul Westra Cowen and Company Analyst
Yes, yes. Yes, new store margin efficiency. I apologize.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
It usually takesPei Wei we get there faster. And it all depends on if youre going into a new
market versus an existing market. Obviously, an existing market, if youre just opening another new
store and youre able to pull experienced staff into those stores, youre going to get up to speed
a lot quicker. If you go into a new store or new market, its going to take a little bit longer to
ramp up.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Hey, Paul, this is Bert. A couple of times in your question, you made the statement of double-digit
unit growth. I dont think that weve said that. We might say that at some point in time, but I
dont expect in the next few years that youll see double-digit unit growth at Pei Wei.
Paul Westra Cowen and Company Analyst
I thought you said 10 to 15 units, not percentage.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Units, not percentage.
Paul Westra Cowen and Company Analyst
Correct.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Okay, units, not percentage. Okay, thank you.
Paul Westra Cowen and Company Analyst
Okay.
Operator
Our next question comes from Greg Schraeder from Wisco Research. Go ahead, your line is open.
Greg Schraeder Wisco Research Analyst
Hi, two questions. The first one just a simple modeling question. The tax rate expectation for the
year, can you give us any guidance there?
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Mark Mumford P.F. Changs China Bistro, Inc. CFO
Yes. The tax rate that were going to use in the back half of the year is 30.2%. We were favorable
to that in Q2. We had a favorable discrete item related to some interest income that we recognized
in the FAS48 item. Since its from a tax receivable from the IRS, that reduced our tax rate for
this quarter to 28.7%, and that was worth about $0.01 of EPS benefit in the quarter.
Greg Schraeder Wisco Research Analyst
Okay, secondly, you didnt really talk too much about the Unilever launch in the second quarter. I
just wondered if you could maybe discuss a little bit how smoothly that went, and how many points
of distribution year-end in today? And then maybe talk a little bit more about if you believe there
are some opportunities to tie in that frozen food business with the Bistro and drive traffic to
your restaurant.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Hey, Greg, this is Bert. Youre right. We havent said a great deal about our partnership with
Unilever. It did begin in the second quarter, and as I think I mentioned in my comments, both
parties, I think, are very pleased with what we have seen so far. Its still very, very early on. I
think we areI think Unilever is pleased with the distribution footprint at this point; but again,
itswere not going to add a lot of color beyond those statements at this juncture. As time
progresses and as we all hope this becomes more of a material piece to our business, well probably
say a few more things, but at this juncture, were probably going to leave it at that.
Greg Schraeder Wisco Research Analyst
Okay, thank you.
Operator
Our next question comes from Bryan Elliott of Raymond James. Go ahead, sir, your line is open.
Bryan Elliott Raymond James & Associates Analyst
Thanks. Just a quick comment first. Dont you think it would be easier if you just published our
model for us like you used to and save time? But this is a bit of a follow-up and the timing is bad
given what Bert, you just said. I was going to ask the following question, and that is that you
have said last call and maybe the call before that in talking about first half versus second, etc.,
that one of the factors supporting confidence in the second half was research that Unilever shared
with you that said, gee, when we go out and start advertising this frozen product, it is going to
drive a lot of people into your restaurant. And I wondered if you feel like youre seeing that, if
that is a major factor in the improvement that you have seen, or if you think this is a more
fundamental improvement at the Bistro the last few months? Or I guess more normal improvement, not
necessarily tied to the advertising and other factors relating to the rollout.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Bryan, this is Bert. We have seen sequential improvement in the Bistro business since last summer.
So what youre seeing, in our opinion, is just a continuation of a slow, steady trend across our
system. Yes, the Unilever is spending some money from a marketing standpoint within movie theatres
and on both cable and network TV at this point. And I dare say, although its very difficult to
quantify, I dare say were seeing some positive lift from that. How much? We dont know.
As we think about the back half of the year, ne of the positives that we had hoped for would be a
little bit of lift around that advertising. Again, were about three weeks into the back half of
the year now, and well see whether or not that does resonate in the back half or not. We think
they did a very, very good job with respect to theirwith respect to their TV commercial and the
movie trailer. I have got to believe it probably helps us and doesnt hurt us. But again, that is
more belief than a fact at this point.
Bryan Elliott Raymond James & Associates Analyst
And they have been running the ads for what, about eight weeks now?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Off and on and in different venues. Basically since theit kicked off at the end of May and its
been running since then. Again, off and on and in different venues.
Bryan Elliott Raymond James & Associates Analyst
Okay, All right. And just real quick, you said youre not sure why people come into your
restaurant. I have done a lot of research on that, theyre hungry for Chinese food.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
That is what I love.
Operator
Our next question comes from Greg Ruedy of Stephens. Go ahead, your line is open.
Greg Ruedy Stephens Inc. Analyst
Thanks. I wanted to be clear, Bert, on the July trends; fat, dumb, and happy doesnt necessarily
mean youre dining alone at Pei Wei Monday night? Seriously, though.
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Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
That is correct.
Greg Ruedy Stephens Inc. Analyst
Okay. In all seriousness, what did you learn from that promotion? Should weand then as you roll
out incremental marketing in the second half, how important is it to push a price point to capture
that social guest?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
I will take part of that. I think we learned thatwe continue to learn that the social mediums can
be very effective for promoting our brands. We also learned that, at least in this particular one,
that the popularity of Pei Wei and the reception to a two for $10 around our 10th anniversary
waswe underestimated the traffic. We had a little bit of recovery that we had to do as a result.
The net-net wasit was very positive and incrementally, I think some things that we can build off
of.
Greg Ruedy Stephens Inc. Analyst
And in the second half, the importance to market price point?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Im not sure I understand the question.
Greg Ruedy Stephens Inc. Analyst
How important is it to have a discount put in front of the consumer these days?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Oh, thatPei Wei is not necessarily focussed from a marketing perspective on discounting. It has
been focused on the introduction of new products, usually somewhere in the neighborhood of two to
three a year. Associated with that rollout oftentimes well have one-day-type events. For example,
when we introduced chili beef ramen, we gave the guest for I forget what the exact period of time
was, I think it may have been for a week, if they brought in a grocery package of what I would call
college ramen, we gave them a discount on their chili beef ramen and then we turned around and
made a donation to the local food bank. So there is some level of promotion as we introduce new
product, but as an ongoing tactic, discounting is not necessarily one of the strategies that were
going to use.
Greg Ruedy Stephens Inc. Analyst
Great, thanks.
Operator
Our next question comes from Mitch Speiser of Buckingham Research. Go ahead, sir, your line is
open.
Mitchell Speiser Buckingham Research Group Analyst
Great. Thanks very much. My first question is on the margin outlook for the second half. If you
back into the numbers, it looks like youre looking for about 125 basis points of store level
margin improvement in the back half of 2010. There is one less week in the back half versus a year
ago. I know its comps driven, but in your models, where do you see that margin improvement coming?
Is it simply from the labor line, and perhaps the food line given some pricing and the chicken mix?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
This is Mark. And when youre saying your basis point improvement, are you looking versus the first
half or year-over-year?
Mitchell Speiser Buckingham Research Group Analyst
On a year-over-year basis, I think you need about 125 bips to get to flat for the year.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Yes. And youre considering global brands. Global brands obviously is going to be part of that.
Mitchell Speiser Buckingham Research Group Analyst
Okay.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
On a year-over-year basis. We do expect to see a little bit favorability, obviously, in cost of
sale. As we talked earlier, G&A is probably going to trend favorable for us. Preopening expense is
going to be favorable. Last year in preopening, we sent roughly $3 million in the back half of the
year and were going to spend $1.1 million or so in the back half of this year. So youre going to
see quite a bit of improvement in preopening.
Mitchell Speiser Buckingham Research Group Analyst
Im sorry, Mark, when you say restaurant margins flat for the year, which was in the release.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Restaurant operating income?
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Mitchell Speiser Buckingham Research Group Analyst
Isnt that above the preopening and G&A line?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Yes, yes.
Mitchell Speiser Buckingham Research Group Analyst
Okay.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
I was going all the way to operating income. Yes, on the restaurant operating income, its really
going to be driven mainly from the prime costs, cost of sales, labor, and so forth. Were going to
see pressure, so its going to be flat to slightly up on operating occupancy and depreciation. The
only ones you have left are really labor and operating.
Mitchell Speiser Buckingham Research Group Analyst
Got it. Thanks. And, Bert, not to harp on the July comments, but in previous quarters, you have
given a lot more granularity on your current month trends. Besides fat, dumb, and happy, can you
give us any numerical numbers on July?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
What type of numbers would you like?
Mitchell Speiser Buckingham Research Group Analyst
Just how the exact comps are doing at the Bistro and Pei Wei? If you dont want to go that far, I
know last quarter you mentioned a 200 bip improvement versus first quarter, thats how April was
running. It sounds like youre happy with July, but are we talking up 2, are we talking up 5?
Anymore specifics on that?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
The Bistro is running up about 3 right now, Mitch, and Pei Wei is running up about 2.
Mitchell Speiser Buckingham Research Group Analyst
Great, thanks. I didnt think I would get that out of you. Secondly just on the average weekly
sales versus comps.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Now youre emboldened to ask more?
Mitchell Speiser Buckingham Research Group Analyst
I should probably just stop there. On average weeklies growth versus comps growth with the shift
working in your favor in the third quarter, is it possible that average weekly sales growth can
actually be above comp growth in the third quarter and maybe the fourth quarter?
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
It is as of right now, Mitch.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Yes.
Mitchell Speiser Buckingham Research Group Analyst
Oh, great. Good to here.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Again, that has more to do with the shift of July Fourth than anything else. Its a fun fact, but
it really doesnt mean a lot.
Mitchell Speiser Buckingham Research Group Analyst
Okay, I understand. Thank you. And just lastly, you did mention, I think, in a couple of conference
calls in June that California has turned positive for you. Has that trend continued in July? And
did the pace accelerate or decelerate?
Mark Mumford P.F. Changs China Bistro, Inc. CFO
This is Mark. California has been one of our best improving markets so far this year. Last year,
theyre running close to double digit declines in 2009. In Q2, they nibbled up, got close to even;
but for Q2, they were still down less than 1%, but significant improvement.
Mitchell Speiser Buckingham Research Group Analyst
Great. Thank you very much.
Operator
Our next question comes from Matthew DiFrisco of Oppenheimer. Go ahead, your line is open.
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Matthew DiFrisco Oppenheimer & Co. Analyst
I have no more questions and Ill show mercy, so I will pass. Thanks.
Rick Federico P.F. Changs China Bistro, Inc. Chairman & co-CEO
Looks like youre the last question.
Mark Mumford P.F. Changs China Bistro, Inc. CFO
Exactly.
Robert Vivian P.F. Changs China Bistro, Inc. co-CEO
Thank you all for joining us today. We ran a little bit long but that is okay. We want to give
everybody the opportunity to ask whatever questions you have. We appreciate that.
Our next earnings release date, I believe, is October 27th. Were looking forward to getting back
together and talking about the state of our business. Appreciate it.
Operator
This concludes todays conference. Thank you for your participation. You may now disconnect
your lines.
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