P.F. Chang’s China Bistro Inc. continued to see same-store sales slide at its namesake casual-dining chain and fast-casual Pei Wei chain in the fourth quarter, but executives said Thursday in a call discussing quarterly earnings that they have initiatives in place to stem declining traffic.
Plans include a new “Triple Dragon” initiative at the P.F. Chang’s chain to launch April 2 systemwide, the April opening of a new lower-priced “Asian Market” extension of the Pei Wei Asian Diner brand in Phoenix and continued expansion of both brands internationally.
The company’s initiatives to increase sales and grow traffic at the 204-unit P.F. Chang’s were “focused on enhancements to our price-value proposition in four core areas: menu innovation, improved service, lower-priced dining options and the reimaging of our restaurants,” P.F. Chang’s chairman and chief executive Rick Federico said in a call with analysts.
Many of the ideas for the makeover came from changes at a reimaged unit in Irvine, Calif., and in market tests at locations in the Arizona and Dallas–Fort Worth markets, he said. The lunch test featured smaller-portion versions of P.F. Chang’s 20 most popular menu items with soup or salad for less than $10.
“So far, these menu items have been extremely popular, and we’ve seen a steady increase in traffic,” Federico said. Lunch traffic was up as much as 20 percent since marketing efforts began, he added.
Dubbed the “Triple Dragon” initiative, the strategy blends “the new lunch menu, some of the best items from our innovation bistro menu, new music and a new look for our service team,” Federico said.
The menu includes more small-plate offerings; more salads, such as the popular Thai Chicken Noodle and Vietnamese Crab; and more wok-cooked items. Customers have also expressed an interest in sushi and expanded vegetarian items, he said.
While the 173-unit Pei Wei Asian Diner brand added on Oct. 10 its new value-oriented “Diner Selects” menu, featuring smaller portions of five signature Pei Wei entrées with rice and a choice of soup, slaw or spring roll starting at $6.25, the new Asian Market in Phoenix will be even faster and cheaper, Federico said.
The Asian Market aims to address both price and service speed, and offer the company more real estate flexibility. The Market is 2,500 square feet versus the current 3,200 square feet in traditional Pei Wei format.
“We’ll also have the flexibility to provide more seating for single and individual diners,” Federico said.
The Asian Market will offer more menu items at lower price points, more items in smaller portions and more portable options.
“The Market will be more affordable, with small plates starting at $1.95 and featuring some of Pei Wei’s current favorite menu items for $5.95,” he said.
Executives expect the Asian Market to have higher operating margins.
The market will be in test over the next year, and three or four of the expected 16 to 20 new Pei Wei locations in 2012 will be in the market format, Federico said.
P.F. Chang’s China Bistro Inc. reported Thursday that net income in the fourth quarter ended Jan. 1 fell to $4.1 million, or 19 cents a share, on special adjustments, from $14.7 million, or 64 cents a share, in the same quarter last year. Revenue fell to $309.8 million in the quarter, from $311.2 million in the prior-year period.
Declining guest traffic in the quarter led to same-store sales decreases of 2.4 percent at the P.F. Chang’s chain and 1.9 percent at Pei Wei.
“While we were not satisfied with our earnings in the fourth quarter, we were pleased with our progress on the top line. We remain confident in the direction of recent initiatives to restore positive sales momentum, which have shown encouraging early signs in the first half of our first fiscal quarter,” Federico said in a statement.
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P.F. Chang’s executives also disclosed more details in the earnings call about the board’s agreement to acquire a majority interest in the four-unit True Food Kitchen concept, converting the company’s $10 million credit facility of 2009 into an equity stake in the health-oriented casual-dining concept.
Executives also discussed:
Same-store sales by month: Both brands saw decreases in all three months of the quarter. P.F. Chang’s saw declines of 3.2 percent in October, 3.1 percent in November and 1.1 percent in December. Pei Wei saw declines of 3.2 percent in October, 0.9 percent in November and 1.4 percent in December.
Adjusted earnings: Mark D. Mumford, P.F. Chang’s chief financial officer, said earnings would have been 11 cents higher, or 30 cents per share, in the quarter, but the company made several impairment charges. Those included $5 million to impair two P.F. Chang’s locations in Cambridge, Mass., and Chevy Chase, Md., that remain open but had negative cash flows over the 12 trailing months; and $1.3 million for lease termination of three underperforming Pei Wei restaurants that were closed at the end of the fourth quarter.
Geographic strength: “We saw negative comps in most states,” Mumford said of the fourth quarter. The casual-dining P.F. Chang’s saw sequential same-store sales improve in California and New Jersey, but slip in Arizona, Florida and Texas.
Commodity costs: Food costs were higher for “most of our product basket,” Mumford said, with cost of sales increasing about 70 basis points over the quarter last year. Key commodity price increases were seen in wok oil, Asian imports, seafood, produce and beef, he said, but rebates on contracted poultry helped offset some of the those increases.
Guidance: Mumford said P.F. Chang’s expects revenue growth of 1 percent to 2 percent in 2012, with an expectation for flat same-store sales for the year, with improvements in the second half. Global brand revenue is expected to increase 60 percent this year, he said.
Loyalty program: In January, P.F. Chang’s rolled out a new Warrior Rewards Card program. Federico said it better targets rewards and special offers.
Development for 2012: The company expects to open two to three new P.F. Chang’s restaurants domestically, in addition to 12 to 16 Pei Wei units, Mumford said. Internationally, partners are expected to open 10 to 14 new P.F. Chang’s, adding to the 17 in operation abroad at the end of 2011. Additionally, two to four international Pei Weis are expected to open this year, as well as three to five airport locations.
“Global brands are becoming an increasingly important part of our business as we work to bring our brands to foreign markets, alternative domestic venues and consumers in the grocery stores,” Federico said. The company ended 2011 with nine P.F. Chang’s locations in Mexico, five in the Middle East, two in Hawaii and a first location in Puerto Rico.
“The Puerto Rico location is now one of the highest volume Bistros in the world,” Federico said.
In January, the company opened its first P.F. Chang’s location in the Philippines. “This is our first location in Asia and should give us some insight as to how we play in that part of the world,” Federico said.
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