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P.F. Chang’s outlines turnaround plan

P.F. Chang’s outlines turnaround plan

After 2Q earnings drop, chain discusses menu, remodeling

P.F. Chang’s China Bistro Inc. unveiled a series of initiatives and more-affordable menu items designed to drive traffic and combat a 29-percent decline in second-quarter earnings, the company reported Wednesday.

The company also downgraded its outlook for the year, saying earnings would be between $1.60 and $1.70 per share, compared with earlier projections of $2.15 to $2.20. Same-store sales for its two concepts will likely fall 2 percent to 3 percent for the year, the company said.

For the quarter ended July 3, the Scottsdale, Ariz.-based casual dining chain reported net income of $9.1 million, compared with $12.8 million for the same quarter a year ago.

Revenues fell almost 1 percent to $311 million, compared with $312.8 million in the prior year.

While expressing disappointment in the results, Rick Federico, P.F. Chang’s chair and chief executive, said the company now has a better understanding of the reasons behind the trend and what will help it restore momentum.

“While we’re clearly not happy with our recent performance, we’re not discouraged,” Federico said. “Through enhanced consumer research and further internal analysis, we have gained more clarity into the issues and are taking immediate steps to improve our operating performance.”

Same-store sales fell 2.5 percent for the 201-unit P.F. Chang’s Bistro, and dropped 2.7 percent for the secondary 173-unit Pei Wei brand — despite a 1.7-percent increase in menu prices in May.

Company officials blamed the declines on slowing guest traffic, a trend that began in the first quarter and has continued into the third. Weekend business suffered the most, with sales declines widespread across all regions.

Federico said the same-store sales declines were greatest among tickets under $45, which declined almost 8 percent during the second quarter.

“This tells us we are losing lower ticket guests at an increasing rate,” he said.

Guests, however, are responding to lower price points, Federico said.

Discount promotions, such as the current free lettuce wrap offer for Facebook fans, do a good job of driving traffic, he said, and happy hour was the only positive daypart, thanks to the new Triple Happiness happy hour menu with cocktails and dishes under $6.

As a result, Federico outlined a number of programs to improve the price-value equation and upgrade the experience for both brands:

P.F. Chang’s China Bistro: The company is testing a new lunch menu that features more traditional lunch items, such as soup and sandwich wraps.

Designed to be lighter, lower in price and quicker to serve, the lunch menu features Asian-inspired dishes, such as a Vietnamese banh mi sandwich wrap.

Federico said the concept will see more items off the grill, which have a more healthful profile and offer an alternative for guests who may veto wok-style cooking.

At dinner, the chain is planning to add more dishes in the $8 to $12 range, he said. And enhancements to the happy hour menu will continue.

Federico said the company is also working on improving service, which could temporarily contribute to rising labor costs.

This week the chain also launched a new call center for phone-in orders to free up restaurant hosts to focus more on in-store guests. Phoned-in orders account for about 12 percent of sales, Federico said, and the new call center is expected to drive higher ticket averages.

The company is also accelerating remodeling plans for the brand, and is currently testing a remodeled store in Dallas that has outperformed other units in that market by 5 percent to 6 percent, he said.

The company is expecting to invest roughly $25 million in capital in 2012, mostly to accelerate the remodel of Bistro locations.

Pei Wei: The company’s secondary chain gets high scores for price value, Federico said, but research shows that the menu doesn’t include enough items in the $3 to $6 range.

The chain is testing a new lunch menu offering called “Pei Wei Select” that includes slightly smaller portions, combined with a spring roll, soup or slaw. The combo is being tested in seven locations and has been well received, Federico said.

In August, the chain will introduce Pei Wei Select at lunch and dinner in two large markets with a $6.25 to $6.50 price range. The culinary team is working on more dishes that would fall between $2.95 and $4.95, such as a lemongrass chicken noodle salad for $3.95.

The company has also had success with the return of a caramel chicken limited-time offer. In the fall, a Thai Basil Chicken will be introduced for a limited time.

In October, the chain will launch a marketing initiative to highlight key brand attributes such as freshness and quality.

Pei Wei will also undergo remodels, particularly older locations among the 10-year-old chain.

A remodel of Pei Wei with a “warmer, more comfortable setting with an urban feel,” has also been completed in two Arizona locations. Though early, Federico said they are showing improved performance.

Five new Pei Wei locations were scheduled to open this year, and another 20 are expected to open next year, including units with more flexible designs.

The first of two airport locations for Pei Wei are scheduled to open in the fourth quarter, with more planned in 2012.

Federico said the company is in “advanced discussions” with partners that may open the first international location for Pei Wei, as well as the brand’s first domestic licensed location in New York City, though the agreement is not yet signed.

Federico also said more global growth, particularly for the Bistro brand, is an opportunity. The company currently has 13 international locations.

Grocery products: P.F. Chang’s line of eight retail products in stores exceeded $100 million in sales over the past 12 months, Federico said. Four more new products are set to launch in the second half of this year.

Food costs: P.F. Chang’s said higher food costs also took a toll on margins. For the back half of the year, food inflation was expected to range between 4 percent and 5 percent. Overall for the year, the company expects food costs to be 3 percent to 4 percent higher.

Labor costs: The company saw an increase in workers compensation insurance claims, but officials were not clear whether it was just a temporary cycle or indication of a longer-term trend.

In addition, the company has faced higher labor costs as a result of efforts to manage workforce eligibility.

Earlier this year, workers at several Pei Wei units in Arizona were arrested after a sheriff’s investigation revealed the use of false identities in job applications.

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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