The Real Story: P.F. Chang's Is Overdone

In 2006, more of the same is expected. The company anticipates 1%-2% same-store sales growth with a 2% price hike at the Bistro and a 1.5% increase at Pei Wei -- indicating flat-to-negative traffic growth.

It could be argued: How can you increase traffic when every table is filled? Herein lies the problem. Bryan Elliott, who covers P.F. Chang's for Raymond James, pointed out that the company's $750 in sales per square foot is 50% higher than the average chain restaurant and is second only to The Cheesecake Factory (CAKE Quote).

"The only way the Bistro can add capacity is if they can figure out how to get people to eat dinner at 3 o'clock," quipped the analyst, who does not own the shares. Raymond James does not have an investment banking relationship with P.F. Chang's.

Other Issues

P.F. Chang's faces several risks. A rise in utility prices, especially natural gas, is a significant one. Natural gas costs make up 1%-1.5% of cost of sales in a typical restaurant. Any increase in natural gas prices should ding operating margins.

The barrier to entry in its business is small. The company's founder, Paul Fleming, who left P.F. Chang's several years ago, has teamed up with Outback Steakhouse (OSI Quote) to create Paul Lee's Chinese Kitchen. Currently there are only four locations; but you can be sure that Fleming and OSI didn't enter into this venture in order to operate four restaurants.

Additionally, there are more thanr 28,000 Chinese restaurants in the U.S, according to the latest census figures. If the local family-owned eatery has the best kung pao chicken in town, it too will likely enjoy an enthusiastic following. Is the local Chinese restaurant going to bring down $1.2 billion-market cap P.F. Chang's? No, but there is not much to stop competitors that can impact P.F. Chang's business from springing up all over the country.