* Q1 EPS $0.38 vs Street view of $0.48
* Discounts, labor costs weigh on margins
* Reducing discounts, raising prices going forward
* Shares fall about 3 percent (Rewrites; adds company comments, background, byline; updates stock prices; previous dateline NEW YORK)
By Lisa Baertlein
LOS ANGELES, April 28 P.F. Chang's China Bistro PFCB.O said it is weaning off discounts and raising prices "modestly" to help it reach its 2010 profit target after happy hour specials dented profits in the first quarter.
Happy hour specials at its namesake restaurants brought in more customers, as hoped. But the discounts reduced the average amount spent by each customer and required managers to bring in more workers to serve those additional guests -- resulting in a bigger-than-expected hit to margins.
P.F. Chang shares fell 3.23 percent to $44.93 on Nasdaq at mid-afternoon, but remain up nearly 20 percent from a year ago.
The Scottsdale, Arizona-based chain on Wednesday affirmed its 2010 profit forecast of $2 per share, and reported a first-quarter profit of 38 cents per share which missed Wall Street's view by 10 cents.
"Our thoughts for the year have not changed. ... Clearly with only 38 cents in our pocket so far, we have some work to do," P.F. Chang Co-Chief Executive Robert Vivian said in a conference call with analysts.
Vivian said the company plans to reduce discounts, including making changes to happy hour and eliminating some prior giveaways.
It also plans to raise menu prices in its P.F. Chang's China Bistro restaurants by 1 percent to 2 percent starting in May. Beyond that, Unilever PLC (ULVR.L) is starting to deliver the company's "Home Menu" frozen entrees to grocery stores.
Nevertheless, the company's 2010 profit forecast remains below analysts' average call for a profit of $2.03 a share, according to Thomson Reuters I/B/E/S.
Revenue edged up 0.2 percent to $310.4 million as overall sales at restaurants open at least 18 months fell 2.7 percent at the Bistro and rose 2.2 percent at the smaller Pei Wei quick-service chain.
Analysts had expected Bistro sales to fall 4.2 percent and for Pei Wei sales to rise 1.8 percent, according to RBC Capital analyst Larry Miller.
"Sales were better, while margins were significantly below our expectations," Miller said in a client note.
Miller said restaurant margins were 10.4 percent versus his estimate of 12.1 percent and that operating margins also fell more than he had expected.
U.S. restaurant stocks have bounced off their lows of the recession as consumer spending improves. As of the close of business on Tuesday, the Dow Jones U.S. Restaurant and Bars index .DJUSRU had a 17 percent year-to-date gain, compared with the 6 percent rise in the Standard & Poor's 500 .SPX.
High-profile companies like Starbucks Corp (SBUX.O) and Chipotle Mexican Grill Inc (CMG.N) recently put up strong quarterly results that backed the view that a recovery has taken hold. [ID:nN22174767]
But not all restaurant names are created equal -- as results from P.F. Chang's and others show.
For example, shares in rival Buffalo Wild Wings Inc (BWLD.O) were down more than 18 percent a day after it announced a surprise decline in April same-restaurant sales, which put its 2010 profit forecasts in doubt. [ID:nN27137156]
The weak results helped drag down rival restaurant shares.
Stock in Cheesecake Factory (CAKE.O) fell 5.7 on Nasdaq, while Olive Garden parent Darden Restaurants Inc (DRI.N) slid 2 percent on the New York Stock Exchange. (Additional reporting by Dhanya Skariachan; Editing by Gerald E. McCormick, Dave Zimmerman and Richard Chang)