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P.F.Chang's China Bistro (PFCB)Stock (Casual & Upscale Restaurants Industry, Food & Beverage Industry)
 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 3% since 2005, dropping to just 4.67% in 2007 because of higher operating expenses.[2] 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 2007 comparable store sales at China Bistro restaurants declined 1.6% while Pei Wei comparable store sales remained flat.[3] However, the emerging popularity of Asian cuisine provides a growth opportunity for P.F. Chang's. Sales at Asian restaurants nationwide increased 11.6% during 2007, outpacing most other cuisine categories,[4] and P.F. Chang's earned a record $1.1 billion in revenue in 2007.[5]
[edit] Business Overview   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 172 locations of its China Bistro which account for approximately 78% of the company's revenue.[1] The company also owns 144 locations[8] of the Pei Wei chain which earn about 22% of the company's revenue.[1] However, in 2007, Pei Wei restaurants were particularly affected by higher commodities prices and labor costs, as well as increased expenses associated with opening 37 new restaurants and as a result operated at a loss of $216,000.[2] In 2008, the company plans to open 17 new locations of its China Bistro and 25 new Pei Wei restaurants, focusing on metropolitan areas.[9] [edit] Business Segments[edit] P.F. Chang's China Bistro (78% of Revenue, 100% of Operating Income)China Bistro's revenue increased about 12.3% during 2007, reaching $849.7 million[2], which the company attributes mainly to 20 new restaurant openings in 2007.
[edit] Pei Wei (22% of Revenue, -0.25% of Operating Income)Pei Wei's revenue increased almost 35% in 2007, reaching approximately $243 million[2] which was primarily due to the opening of 37 new Pei Wei restaurants during 2007.[2] Pei Wei's operating income, however, has decreased an average 51% since 2005, when it totaled approximately $2.6 million.[12] In 2007, Pei Wei operated at a loss of $216,000[2] mainly because of higher costs associated with opening 37 new restaurants as well as increased commodities prices, labor costs and operating expenses like utilities.
[edit] Financial AnalysisP.F. Chang's earned $1.1 billion in revenue in 2007, a 17% increase from 2006[2], which was mainly because of its 22% increase in total restaurants during 2007[1]. The company's operating margin decreased from 7.6% in 2005 to 4.67% in 2007 because of higher commodities prices and increased costs of restaurant management and higher hourly wages during 2007.[7] These increases in operating costs especially effected Pei Wei restaurants as its 36.1% increase in operating expenses outpaced its 34.8% growth in revenue during 2007.[2] As a result, P.F. Chang's net income of $32 million in 2007 was a 3.6% decline from 2006 and a 15.1% decrease from 2005.[7] 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.[14] Although the China Bistro's comparable store sales declined by 1.6% in 2007, its 3% increase in average guest check helped the company increase its revenue.[3] Overall, the company plans to slow expansion of its two restaurant chains in 2008 to lessen its vulnerability to lackluster sales in the weakened U.S. economy, opening 15 fewer restaurants in 2008 than in 2007.[15] [edit] Trends and Forces[edit] Increased Commodities Prices and Higher Wages Reduce Operating MarginSince 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.[16] 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.[2] Additionally, labor costs, primarily hourly wages and costs of chefs, have increased an average of 17.6% annually since 2005.[17] 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.[18] 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.[19] Together, the company's cost of sales and labor expenses were the primary contributors to its approximate 18% increase in operating expenses since 2005, which have outpaced the company's 16.2% increase in revenue during that period.[2] Furthermore, the company's operating margin has decreased about 3% since 2005, reaching 4.67% in 2007 because of its higher operating expenses.[2] [edit] Weakened U.S. Economy Slows Restaurant Traffic and SalesIn 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. A 2007 Restaurant Industry Study by Technomic showed that restaurants reduced funding for expansion by an average of 1.4% during 2007, attributing this to poor economic conditions[20]. Although P.F. Chang's total revenue continues to increase, comparable store sales declined 1.6% in 2007 at China Bistro while staying flat at Pei Wei as consumers began to subsitute for slightly cheaper options like Panda Express.[3] Furthermore, comparable store sales in Q2 2008 decreased 2.3% and 3.2% at China Bistro and Pei Wei restaurants, respectively, despite slight menu price increases at both restaurant chains.[21] As a result of slumping sales, the company cut its planned restaurant openings by 26% for 2008.[22] [edit] Rising Popularity of Asian Cuisine Spurs SalesAlthough 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.[23] The company's 2008 expansions of 17 China Bistro and 25 Pei Wei restaurants, although significantly less than 2007, plan 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. [edit] CompetitionThe Asian niche of the casual & upscale restaurants industry is primarily comprised of small, locally-owned restaurants with only one or two locations.[24] 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).
 P.F.Chang's China Bistro2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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