P.F. Chang's China Bistro (NASDAQ:PFCB) runs two chains of Asian restaurants, P.F. Chang's China Bistro and Pei Wei. As of 2008, PFCB operated 189 China Bistro locations and 159 Pei Wei restaurants. In 2008, PFCB earned about $1.2 billion in revenue, a 10.5% increase from a year earlier, due to 42 new restaurant openings during the year.
P.F. Chang's is vulnerable to increases in commodities prices that raise the cost of preparing its food, and the company's operating margin has decreased 2.2% since 2004, dropping to just 4.4% in 2008 because of higher operating expenses. Revenues are impacted by trends in consumer spending. A weak economy and rising food and gas prices reduce the amount of disposable income consumers can spend dining out, and in 2008 comparable store sales at China Bistro restaurants declined 3.2% while Pei Wei comparable store sales dropped 3.7%. ]
P.F. Chang's China Bistro operates one of the largest Asian restaurant chains in the United States by revenue and restaurant locations. The company operates two restaurant chains, its namesake P.F. Chang's China Bistro, and Pei Wei, a fast food Asian restaurant chain. The company operates 189 locations of its China Bistro which account for approximately 77% of the company's revenue. The company also owns 159 locations of the Pei Wei chain which earn about 23% of the company's revenue. Together, the two restaurant franchises earned about $1.2 billion in revenue in 2008, a 10.5% growth from 2007. In 2009, the company expects its sales to remain flat because of declining consumer spending. As a result, the company only plans to open between four and six new Bistro locations and two to four Pei Wei restaurants in 2009, significantly less than the 17 and 25 new Bistro and Pei Wei restaurants opened in 2008.
P.F. Chang's earned $1.2 billion in revenue in 2008, a 10.5% increase from 2007. PFCB attributes this growth mainly to the additon of 42 new restaurants in 2008, which was partially offset by declines in comparable store sales. The company attributes reductions in traffic in both its restaurants to decreased amounts of consumer dispensable income caused by the subprime lending crisis in 2007. For example, a 2007 RBC Capital Markets survey indicated that 39% of respondents had reduced their frequency of dining at restaurants. In 2008, PFCB's operating expenses outpaced its revenue, increasing by 11.1% because of higher cost of sales and marketing expenditures.
Because of the increase in operating expenses, PFCB's operating income dropped by 1.5% in 2008. Furthermore, the company's cost of sales and labor expenses were the primary contributors to its approximate 14.7% average annual increase in operating expenses since 2004, which have outpaced the company's 13.9% increase in revenue during that period. Additionally, the company's operating margin has decreased about 2.2% since 2004, reaching 4.4% in 2008 because of its higher operating expenses.Moving forward, the company expects to only open four to six new China Bistro restaurants and two to four new Pei Wei locations in 2009 because of the weakened consumer environment.
Since 2005, increases in prices of food and labor have spurred P.F. Chang's steady decline in operating margin. In 2007, wholesale foods reached their highest prices in 27 years. From 2005 to 2007, P.F. Chang's cost of sales increased an average 13.4% annually, particularly due to increases in fruit and vegetable prices and beef prices. In 2008, however, PFCB's cost of sales increased 9.6% because of new restaurant openings, but decreased as a percentage of sales from 27.4% in 2007 to 27.2% in 2008.
Additionally, labor costs, primarily hourly wages and costs of chefs, have increased an average 14.3% since 2004 because of wage increases as well as restaurant expansion. These costs have been historically variable from each state but as of 2006, 23 states had a minimum wage higher than the $5.15 per hour national minimum. Furthermore, as part of the Fair Minimum Wage Act of 2007 the national minimum wage will increase over 40% during 2008 and 2009 to $7.25 per hour, which will significantly raise P.F. Chang's labor expenses as the company pays this wage to many of its employees.
Together, the company's cost of sales and labor expenses were the primary contributors to its approximate 14.7% average annual increase in operating expenses since 2004, which have outpaced the company's 13.9% increase in revenue during that period. Furthermore, the company's operating margin has decreased about 2.2% since 2004, reaching 4.4% in 2008 because of its higher operating expenses.
In 2008, revenues and traffic have declined across the restaurant dining sector as consumers respond to the 2007 Credit Crunch and subprime lending crisis by saving money and eating at home. Although P.F. Chang's total revenue continues to increase, comparable store sales declined 3.2% in 2008 at China Bistro while dropping 3.7% at Pei Wei as consumers began to subsitute for slightly cheaper options like Panda Express. As a result of slowing sales, PFCB only plans on opening a handful of each of its restaurants in 2009, compared to a total of 42 new restaurants opened in 2008.
Although the weakened U.S. economy has slowed the growth of the restaurant industry overall, the emerging popularity of Asian cuisine helps P.F. Chang's restaurants maintain positive sales growth. In 2007, Asian restaurants grew 11.6% in revenue, outpacing growth in most other cuisine categories. The company's 2008 expansions of 17 China Bistro and 25 Pei Wei restaurants, although significantly less than 2007, planned to capitalize on the increasing demand for Asian cuisine primarily through Pei Wei's expansion into new, untapped markets during 2008. Furthermore, the company has added new menu items at its China Bistro chain (an example is Citrus Soy Salmon) and has started to offer more affordable lunch-sized entrees in order to maintain relevance with customers and increase China Bistro's lunch sales.
The Asian niche of the casual & upscale restaurants industry is primarily comprised of small, locally-owned restaurants with only one or two locations. P.F. Chang's restaurants also compete with several large national Asian restaurant chains, including Panda Express, Pick Up Stix restaurants of Carlson Restaurants Worldwide, Inc., Benihana (BNHNA) and Kona Grill (KONA).
|Company||Revenue 2008 (Millions)||Total Number of Restaurants||Comparable Restaurant Sales 2008 (Negative)||Average Check Size||Net Income (Thousands) (Loss)||Operating Margin (Negative)|
|P.F.Chang's China Bistro (PFCB)||$1,198.1||348||(3.2%)-China Bistro; (3.7%)-Pei Wei||$20-$21-China Bistro; $8.50-$9.50-Pei Wei||$27,426||4.38%|
|Benihana (BNHNA) (2007 Data)||$297||88||2.4%||$27.63||$12,800||7.24%|
|Kona Grill (KONA)||$75.81||21||(7.2%)||$24||($10,500)||(9.28%)|