CPK units flourish, but stock performance not as saucy

Nation's Restaurant News, August 5, 2002 by Richard Papiernik

Those stomach-churning rumblings coming out of California Pizza kitchen restaurants are not about the food.

If there has been widespread dissatisfaction at the sites housing the units of this Los Angeles-based casual-dining chain, they sure have escaped my detection.

Performance at the chain restaurant's service level and its menu offerings generally gets a high rating on the customer-seal-of-approval scale.

The chain's original BBQ Chicken Pizza helped pioneer a premium, upscale line of a product more prone to discounted home-cooking substitutes and Friday-night-fever searches for the best "toofer" coupons in the kitchen drawer.

On the other hand, performance of California Pizza Kitchen Inc.'s stock is enough to send its shareholders into paroxysms of acid indigestion.

At the end of trading in June, the stock price went up to $24.80, a whole nickel gain for the first six months of this year, barely keeping its balance on the topside of the bottom line. Even small gains were better than the six-month plunges experienced by the general markets, but CPK's performance dragged behind most other foodservice stocks for that period.

The CPK 2001 close at $24.75 was off 12 percent, or $3.50, from its January start at $28.25. So it has been tumbling. By late July 2002 the stock was trading in the $19 range before moving to about $22 a share.

CPK obviously is caught up in the whirlwind of Wall Street volatility, and its stock price has fallen far behind any reflection of financial and operational performance. Yes, there is some concern about the concentration of ownership by its biggest investors. But most of the low valuation -- and the lack of respect in the trading market -- emanates from Street expectations that CPK could at some point falter financially.

That expectation centers on the question of how long the company can continue to generate climbing sales comps. The question has been answered time after time as CPK continues churning out comp gains.

Since 1997, when CPK finished the year with a scant gain of six-tenths of a percentage point, every quarter has been positive. Several three-month periods have shown robust year-over-year comp growth of between 5 percent and 9 percent.

US. Bancorp Piper Jaffray analyst Allan Hickok says "possible" risks ahead are related to problems "endemic to the restaurant and retail industries in general." He cautions that a "protracted or worsening economy would clearly negatively impact restaurant sales, margins and profits in general."

Furthermore, the industry's limited ability to raise menu prices significantly to offset possible increases in utility, labor and commodity costs could cut into margins.

CPK, in reports to the Securities and Exchange Commission, concedes that with 46 percent of its restaurants located in California, the company is highly sensitive to economic impacts in a state noted for its high real-estate, utility and labor costs.

But Beverly Hills is where CPK started in 1985, building its initial base of 25 restaurants. PepsiCo acquired the company in 1992.

But by 1997 the beverage company had disgorged its restaurant business. Its Taco Bell, KFC and Pizza Hut brands were spun off on their own in a stock issue for what is now Yum! Brands Inc. The other restaurant chains, including CPK, were out, left to fend for themselves.

In September 1997 an investor group led by Bruckmann, Rosser Sherrill & Co. acquired a 67.4-percent controlling interest in CPK.

With all the transitional changes going on at the time, the 1997 loss tallied $11.7 million. CPK has been profitable ever since, sometimes slowing up but continuing positive results -- first to $10.6 million in 1998, then to $5.4 million in 1999, $8.4 million in 2000 and $13.2 million in 2001.

In the second quarter of 2002, year-over-year revenues were up 25 percent, to $75.6 million. Net income increased by 31 percent, to $43 million.

Hickok, despite his cautionary remarks, is one of several analysts to categorize CPK stock with a "buy" or "outperform" rating, predicting continued growth in earnings.

He describes CPK as "a small company with great growth concepts and growth opportunity."

CPK revenues in 2001 were nearly $250 million and are projected to top $303 million this year and $368 million in 2003.

The company's premium pizza signature items generate about 30 percent of sales in addition to a full line of pastas, salads, sandwiches, desserts and beverages. There also is an ASAP small-prototype restaurant tailored to airport and travel mall locations. And a recent retailing partnership with Kraft Pizza Co. has put a CPK frozen pizza line in supermarkets.

CPK's president and chief executive, Fred Hipp, notes that second-quarter same-store-sales gains were at 5.1 percent, and average weekly sales for the company's full-service restaurants were $56,631, up from $55,029 in the year-ago quarter.

With those kinds of performance numbers in mind, Hipp says that during this year, the company plans to open "a minimum" of 10 additional restaurants for a total of "at least 17" in 2002. Samestore sales will come in at 3.5 percent to 4.5 percent in the third quarter this year, he adds.