California Pizza Kitchen

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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

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