Tuesday, April 28, 2009

Not So Fast PF Chang's?

Last week I did some work on the casual restaurant chains, and their recent strong performance. This was posted over at Fund My Mutual Fund. For the full analysis of PF Chang's and others, head over there. The thesis here is that restaurants are boosting quarterly earnings by cutting costs and taking advantage of lower commodity prices and decreased analyst expectations.

I just wanted to follow up a bit here as I read a Barron's Article this morning about PF Chang's. They are basically taking the same viewpoint as mine, that shares are getting a little too high, and that it will be tough to sustain earnings in the current fashion.

  • PF Chang's has been among the leading beneficiaries of overeager investors. The chain of restaurants jumped 24% last week after it reported surprisingly strong first-quarter results, stemming from an impressive series of cost-cutting measures. The company managed to grow operating profits despite declining sales figures at its restaurants opened for more than a year, a widely used measure known as comparable sales.
  • P.F. Chang's stock has brushed off the sales figures, with shares up 120% from a November multi-year low. They're up 83% during the broader market rally that began in early March.
  • Casual dining stocks have generally benefited from strong earnings in the first quarter, thanks to cost containment and easing commodity costs, according to Mark Basham, a restaurants analyst at Standard & Poor's Equity Research. "My view is the vast majority of the cost cuts are not sustainable," Basham says. "They reflect things like deferred maintenance and labor costs."

Its important to realize that the trend can continue for some time, and part of the rally was due to the heavy short interest in these stocks and subsequent covering. But my viewpoint remains that they will see some difficulty ahead, and I found these comments interesting:

  • The optimism only goes so far. On a conference call last week, P.F. Chang's co-Chief Executive Officer Robert Vivian cautioned investors that the earnings revision was "not because our business has suddenly become healthy and more vibrant." He said: "We are working very hard to provide the best possible experience for our guests with the belief that we will ultimately serve more of them. At this juncture it is still a belief, not a fact."

No Position in Stock Mentioned.

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