CPK chief Hipp resigns as new-unit sales results disappoint

Nation's Restaurant News, August 4, 2003 by Amy Spector

LOS ANGELES -- California Pizza Kitchen co chairmen Larry Flax and Rick Rosenfield, dissatisfied with the company's real-estate strategy and new-unit performance, accepted the resignation of president and chief executive Fred Hipp and returned to their roles as co-chief executives.

Hipp's interim replacement as president of the 159-unit chain is H.G. "Carey" Carrington, a former CPK chief financial officer and executive vice president who left the company in 2001. Carrington had been selected as CFO by Hipp when he joined CPK in 1998, after a 17-year tenure at Kansas City, Mo.-based Houlihan's, which Hipp helped steer through a decade of change, setbacks and growth as its president and chief executive.

Carrington returns to CPK after a yearlong stint at U.S. Restaurant Properties, which he left last October in order to pursue personal investments, Rosenfield said. Carrington declined to state his objectives for CPK, saying it had yet to complete a strategic review.

Differing opinions about brand expansion and the company's fast-casual variant, California Pizza Kitchen ASAP, were behind Hipp's departure, Rosenfield said.

"There was a difference in strategy between us and Fred," Rosenfield explained. "We want to devote resources to ASAP. We'll tinker with it to get the concept where we want."

CPK currently operates three of the ASAP outlets and franchises 21, of which airport concessionaire HMSHost operates 20.

Flax echoed Rosenfield's comments, noting, "ASAP is a tremendous vehicle to reach families in a hurry when they are looking for a [sit-down, casual-dining] type of experience." Flax also indicated that the company would consider creating a fast-casual version of the upscale-casual LA Food Show concept that he and Rosenfield recently opened in Manhattan Beach, Calif., and in which CPK holds a 25-percent ownership stake.

Mike Smith, an analyst with the Kansas City, Mo.-based investment firm of Fahnestock & Co., asked Flax and Rosenfield during a recent conference call whether CPK would "roll in"--fully acquire--LA Food Show.

Rosenfield replied, "Given the fact that Larry and I are back [in the CEO helm at CPK], I would think the board would want to revisit [an LA Food Show acquisition] sooner rather than later."

Discussing CPK's second-quarter financial results, Rosenfield said the 18 restaurants opened by the chain in 2002 and the 11 opened so far this year had not met performance objectives, which he attributed to poor site selection and overly aggressive growth. He stressed that CPK did not want to repeat the real-estate errors it had made under PepsiCo ownership from 1992 to 1997, when the chain attempted a rapid-growth strategy.

"If you don't learn from the past, you are doomed to repeat it," Rosenfield said.

Although company officials expressed disappointment with the sales performances of the restaurants that have opened in the last 18 months, CPK managed to tally a 1.2-percent increase in second-quarter net income. The Los Angeles-based company's earnings for the quarter increased to $4.4 million, or 23 cents per diluted share, compared with $4.3 million, or 23 cents a share, in the year-ago quarter. Revenue increased 16 percent to $87.9 million, from $75.6 million in the year-ago quarter. Same-store sales increased 2.3 percent.

However, citing the slower-than-expected sales at restaurants opened in the preceding 18 months and cutbacks in planned openings, CPK's chief financial officer, Greg Levin, lowered the company's fiscal 2003 earnings-per-share estimate to the range of 88 cents to 91 cents, excluding any potential charges. The company earlier had projected EPS of 98 cents to $1.02 for the year.

For fiscal 2004 the company also plans to cut back its restaurant openings to between 10 and [2 new units, compared with the 22 locations scheduled to open this year. Also for 2004, CPK is projecting diluted EPS in the range of $1.05 to $1.10 and revenue growth of about 15 percent.

Flax and Rosenfield, former law partners and federal prosecutors who opened their first CPK in 1985 in Beverly Hills, Calif., developed the brand into a trend-setting chain before they sold a majority stake to PepsiCo Inc. in 1992. The beverage and former restaurant giant eventually spun its quick-service arm into the company that today is Yum! Brands, while CPK was sold in 1997 to the New York investment firm Bruckmann, Rosser, Sherrill & Co. That company took CPK public in 2000. All the while the founding partners remained co-chairmen of CPK's board.

Until 1996, Rosenfield said, he and Flax also were the company's co-CEOs. "We are excited about the opportunity to be back at this brand" in that capacity, Flax said.

Harold Rosser, a principal of Bruckmann, Rosser, Sherrill & Co., resigned from the CPK board in early July. When Bruckmann, Rosser purchased CPK, the investment firm "held most of the stock, and they controlled the board," Rosenfield said. In February the firm "sold the last chunk of [its] stock, and the board had changed" to independent members, he added.