July 27, 2011 / 11:31 AM / 7 years ago

UPDATE 4-High prices keep diners away from PF Chang's

* EPS from cont ops 40 cents vs Wall St view 55 cents

* Same-store sales fall at both Bistro and Pei Wei

* Sees same-store sales down at both chains rest of year

* Sees higher labor costs, fall in restaurant oper income

* Shares fall 12 percent (Adds profit outlook, rivals, analyst comments, bylines)

By Dhanya Skariachan and Lisa Baertlein

NEW YORK, July 27 (Reuters) - P.F. Chang’s China Bistro Inc PFCB.O slashed its profit outlook and forecast a drop in same-restaurant sales at both its Bistro and Pei Wei chains as recently raised prices kept budget-conscious diners away.

The operator of P.F. Chang’s Asian-style bistro restaurants and the smaller Pei Wei quick-service chain also reported a weaker-than-expected quarterly profit and forecast a fall in restaurant operating income for 2011 on higher labor costs.

The news pushed its shares down more than 12 percent to $34.40 on Wednesday and prompted Janney Capital Markets analyst Mark Kalinowski to downgrade the company’s stock to “neutral” from “buy.”

“While the shares’ valuation may be attractive for value-oriented, patient shareholders, the stock should act as “dead money” for the near term at least,” Kalinowski said. “Simply put, there are better restaurant-stock investment ideas elsewhere.”

Scottsdale, Arizona-based P.F. Chang’s China Bistro recently raised menu prices 1 percent to 2 percent at the Bistro and 2 percent to 3 percent at Pei Wei.

Restaurant companies ranging from McDonald’s (MCD.N) to Chipotle Mexican Grill (CMG.N) are grappling with higher costs for key ingredients like beef and produce, and are cautiously raising prices to cover some of those extra expenses.

The higher prices are keeping diners away.

Sales at restaurants open at least 18 months fell 2.5 percent at the Bistro and 2.7 percent at the smaller Pei Wei quick-service chain in the second quarter. Based on recent trends, the company anticipates same-store sales declines of 2 percent to 3 percent at both chains for the rest of the year.

“We now know that the No. 1 sales challenge at both concepts relates to our entry-level price points,” Chairman and CEO Rick Federico said on a conference call.

“Many consumers have a strong affinity for our brand but (are) just finding them a bit too expensive for their everyday use,” he added.

The company now sees restaurant operating income falling about 120 basis points in fiscal 2011. It expects earnings per share of $1.60 to $1.70, down from its prior outlook of $2.15 to $2.20 a share.

WEAK QUARTER

Its earnings fell to $9.1 million, or 40 cents a share, in the second quarter, from $12.8 million, or 55 cents per share, a year earlier.

Analysts on average were expecting a profit of 55 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell to $311 million from $312.8 million.

In March, eight Pei Wei restaurants in Arizona were closed after local authorities conducted an employment-related identity theft investigation. Those temporary store closures led to about $1.1 million in lost sales. [ID:nL3E7EM26Y]

The closures hurt closely watched same-restaurant sales in the first quarter. [ID:nN27113238] (Reporting by Dhanya Skariachan and Lisa Baertlein; Editing by Lisa Von Ahn and Maureen Bavdek)

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