In Focus

Unscrambling P.F.Chang's China Bistro (Nasdaq: PFCB)

I've been thinking about running P.F.Chang's China Bistro through the Chicks' Dozen since the Olympics. It was the happenin' restaurant in Salt Lake City, even if it meant skipping an event to wait to get a table. (It was too cold to see the luge competition, anyway.) Not only was it the place to be in Utah, wherever P.F.Chang's sets up a kitchen, there is a wait. My husband, Phil, and I have eaten at the bistro in Chicago and many times we've taken a seat in the bar to avoid the wait. In Scottsdale, Arizona, if we don't time our visit perfectly (which means arrive before 5:15 p.m.) we'd have to wait for up to three hours to get a table. The weird thing is; people actually wait! This was a Chicky sign that the people at P.F.Chang's were onto something. I had to dig further to see if our investment dollars would be as satisfied as my appetite is when I leave a Chang's table. Pass me a fortune cookie and we'll begin.

1. Buy What You Know
This is going to be embarrassing, but here is what I know, and know well. This is what the Housley family orders every time at P.F.Chang's:

When Phil and I visit P.F.'s without the kids (and sit in the bar to avoid the wait), we order all of the above appetizers, for our meal. (TV's are also located in the bar area, and if you're married to a TV watcher, sit in the bar. It takes the pressure off having too much conversation. He says we sit there to avoid the wait, but I know better.)

2. Keep it Simple Sister
P.F.Chang's menu is a compilation of dishes from five regions throughout China: Canton, Hunan, Mongolia, Shanghai and Szechwan. Finally a restaurant that has everyone's favorites. P. F. Chang's owns 70 bistros in the United States and 7 Pei Wei Asian Diners. The Pei Wei diners are a mini P.F. Chang's offering limited selections from the big menu. This Pei Wei idea is new, and just starting to catch on. It's the family answer to a nice restaurant. It's much faster and the atmosphere is more casual.

3. Industry
Restaurants. When I went to smartmoney.com to check out P.F.'s competition, they lump them into a field of unrelated restaurants. They compare PFCB to McDonalds, Wendy's and conglomerate chains such as Tricon Global Restaurants which owns Kentucky Fried Chicken and Taco Bell. Like these are even close to a P.F.Chang's experience.

4. Leader in its Field
When the field consists of you and you only. You lead.

5. Repeat Profitability
There is not a P.F.Chang's near me in Minnesota, but if I got away from my computer every once in awhile and drove an hour out to Edina, MN, there stands our only P.F.Chang's. Though, when I'm in Chicago or Scottsdale, I'm there once a week. So, yes, P.F.Chang's repeatedly profits off me.

6. Gross Margin
Their gross margins are 72.92% !! Wow. I must relay this to the Chicks in charge.


7. Net Margins
5.23%. Not bad for the restaurant business!

8. Cash to Long Term Debt
P.F.Chang's has 35.8 million in Cash and only 3 million in long term debt. This far exceeds a Chick wanting them to have at least as much cash as they do long term debt. It surpasses it by more than 12 times!

9. Flow Ratio
Remember we want our Flow Ratio to be under 1.5, which means they are running a tight ship when it comes to inventory and getting their product out the door in a timely fashion, and they manage to hold off creditors. PFCB's Flow Ratio is 0.2!! That is better than any fortune cookie I've cracked open.

10. Increasing Growth
Since P.F.Chang's could be considered to be cyclical; I wanted to compare wontons to wontons. I compared the company's growth to the same quarter a year ago and P.F.Chang's grew by 35%! That's a lotta soup, Subgum.

11. Management & Operating History
The original founder of P.F.Chang's is a man by the name of Paul Fleming. You might have heard of him as he originally owned the rights to Ruth's Chris Steakhouses in some western states. He sold those back to his good friend Ruth (of the steakhouse fame) and decided to start his own restaurant chain. He founded the bistro with Philip Chiang. Mr. Chiang was born in Tokyo and later moved to San Francisco and is the Chinese Cuisine consultant for the restaurants. Hence, you have the P.F. (Paul Fleming) and Chang (Mr. Chiang). On a side note, Paul Fleming couldn't let go of his steakhouse affiliations, so he is also an investor in the Fleming's Prime Steakhouse's across the country.

The CEO of P.F.Chang's is Rick Federico. He is the man behind their growth as of late. He has spent 19 years in the restaurant business, from Steak & Ale's to Macaroni Grills. He was also the Co-founder and V.P. of Grady's Goodtimes until it was taken over by Brinker Int'l. (Brinker Int'l [NYSE:EAT] also could be thrown into our competition if we were smartmoney.com. They own Chili's Bar and Grill, Romanos' Macaroni Grill, and On The Border Mexican Grill and Cantina. But that is another story, for another day, and another meal. I'm getting full.)

12. Buy On Sale
PFCB is not on sale. Its current price is hovering around $38.00 a share. If I were to average their 52-week high and their 52-week low, their "on sale" price would be $28.00. Then again, like my fortune cookie says, "Not all good deals come cheaply, Karin-son."