SCOTTSDALE, Ariz. P.F. Chang’s Bistro Inc. plans to take a “modest” price increase in late May after suffering a 34.9-percent drop in first quarter profit, which the company blamed on discounting and higher labor costs for its namesake concept’s new happy hour.
P.F. Chang’s said Wednesday that profit in the April 4-ended first quarter was $8.7 million, or 38 cents a share, down from $13.3 million, or 57 cents a share, in the same period last year. Revenues increased 0.2 percent, to $310.4 million from $309.8 million in the year-earlier period.
Same-store sales were down 2.7 percent at the Bistro in the first quarter, as a 3.5-percent drop in the average check offset a 0.8-percent bump in traffic. At the fast-casual Pei Wei Asian Diner, same-store sales rose 2.2 percent on a 0.7-percent increase in average check and a 1.5-percent jump in traffic.
Bert Vivian, co-chief executive of P.F. Chang’s said, said traffic has improved this year at both concepts, but he expects both concepts to do less discounting and that the company will “tweak” margins on the happy hour promotion at the Bistro.
P.F. Chang’s also said it will increase prices 1 percent to 2 percent in May.
John Glass, an analyst with Morgan Stanley, said that while P.F. Chang’s missed earnings-per-share expectations by between 9 and 11 cents in the first quarter, the company “showed some important firsts: the first positive traffic at the Bistro since '05, and the first suggestion (at least in a long while) to take pricing to defend margins.”
Vivian, in a call with analysts after the earnings release, said, “We don’t pull the price trigger very often. "
“The fact of the matter is, we’ve seen significant increases over the last few years in some of our fixed costs. That’s a long way of saying our labor costs have gone up,” he said. “Our operations teams have done a great job over the last few years in becoming more efficient in the restaurants, which has offset those labor costs."
Vivian said the company wanted to wait until traffic improved at the Bistro before raising prices.
"We do think the environment is getting better, and we think it’s a more appropriate time [to increase prices]," he said. "But we’re making up for a little bit of time here when it comes to managing our labor costs.”
Some added labor costs in the first quarter were related to the Bistro’s happy hour promotion, which was tested late last year at stores in Arizona and the Pacific Northwest and rolled out systemwide in January. The daily happy hour menu is offered from 3 p.m. to 6 p.m. with appetizers and drinks priced $3 to $6. Some state laws do not allow happy hour promotions, so executives said the program is in between 160 and 170 of the Bistro’s 197 units.
“We’ve got great traction with the happy hour,” Vivian said, crediting it with a 7-percent increase in traffic.
The company said it planned to be more aggressive in the expansion of its 167-unit Pei Wei Asian Diner over the next 18 months.
“Pushing on the gas pedal right now seems appropriate,” said Rick Federico, the company's other chief executive.
He said there are opportunities to expand in developed markets as well as newer ones, such as Washington, D.C., and Philadelphia. He said Pei Wei also plans to enter the Chicago market for the first time.
Executives said the lunch daypart at Pei Wei turned positive in the first quarter, while dinner remained negative.
“This supports the thesis that we’re beginning to see a little bit more business activity,” Vivian said. “Anecdotally, our partners are telling us we are beginning to see more folks from nearby offices stop in.”
P.F. Chang’s said it didn’t expect to see significant income generated from its eight new grocery products, introduced this month by Unilever.
The company said it projects fiscal 2010 revenues will be flat compared to fiscal 2009, based on expectations that average weekly sales will be down slightly at P.F. Chang's and up slightly at Pei Wei. For the year, P.F. Chang’s said it still anticipates earnings per share to be around $2. In 2009, the company's earnings were $1.85 per share.