CALIFORNIA PIZZA KITCHEN
Everyone knows that 95 percent of restaurants fail in the first two years, and a lot of people think it’s ‘location, location, location.’ It could be, but my experience is you have to have the financial staying power. You could have the greatest idea, but many restaurants do not start out making money – they build over time. So it’s really about having the capital and the staying power. — Rick Rosenfield, Co-CEO, California Pizza Kitchen1
In early July 2007 the financial team at California Pizza Kitchen (CPK), led by Chief Financial Officer Susan Collyns, was compiling the preliminary results for the second quarter of 2007. Despite industry challenges of rising commodity, labor, and energy costs, CPK was about to announce near-record quarterly profits of over $6 million. CPK’s profit expansion was explained by strong revenue growth with comparable restaurant sales up over 5%. The announced numbers were fully in line with the company’s forecasted guidance to investors. The company’s results were particularly impressive when contrasted with many other casual dining firms who had experienced sharp declines in customer traffic. Despite the strong performance, industry difficulties were such that CPK’s share price had declined 10% during the month of June to a current value of $22.10. Given the price drop, the management team had discussed repurchasing company shares. With little money in excess cash, however, a large share repurchase program would require debt financing. Since going public in 2000, CPK’s management had avoided putting any debt on the balance sheet. Financial policy was conservative to preserve what co-CEO Rick Rosenfeld referred to as ―staying power.‖ The view was that a strong balance sheet would maintain the borrowing ability needed to support CPK’s expected growth trajectory. Yet, with interest rates on the rise from historical lows, Collyns was aware of the benefits of moderately levering up CPK’s equity.
California Pizza Kitchen Inspired by the gourmet pizza offerings at Wolfgang Puck’s celebrity-filled restaurant Spago and eager to flee their careers as white-collar criminal defense attorneys, Larry Flax and Rick Rosenfield created the first California Pizza Kitchen in 1985 in Beverly Hills. Known for 1
Newsweek Interview, June, 2007.
This case was written by Elizabeth W. Shumadine (MBA ’01) under the supervision of Professor Michael J. Schill based on public information. Copyright © 2008 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to email@example.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
its hearth-baked barbecue-chicken pizza, the ―designer pizza at off-the-rack prices‖ concept took off. Expansion across the state, country and globe followed in the subsequent two decades. At the end of the second quarter, the company had 213 total locations in 28 states and 6 foreign countries. While still very California-centric (approximately 41% of the U.S. stores were in California), the casual dining model had done well throughout all U.S. regions with its familyfriendly surroundings, excellent ingredients and inventive offerings. California Pizza Kitchen derived its revenues from three sources: sales at companyowned restaurants, royalties from franchised restaurants, and royalties from a partnership with Kraft Foods to sell CPK-branded frozen pizzas in grocery stores. While the company had expanded beyond its original concept with two other restaurant brands, its main focus remained on operating company owned full-service CPK restaurants of which there were currently 170 units. Analysts conservatively...