California Pizza Kitchen considers strategic options
With signs that patrons are returning to casual dining chains, Los Angeles-based California Pizza Kitchen Inc. confirmed Monday that it was weighing various business options that may include selling itself.
The news comes as the economy shows signs of improvement and corporate takeover financing becomes more accessible. Analysts said that under such conditions, restaurant chains were increasingly being seen as a potential good buy and suggested that California Pizza Kitchen might want to take advantage of that interest.
The company, with 253 locations worldwide, announced its move as it issued preliminary estimates that first-quarter earnings per share and sales had exceeded expectations.
CPK’s directors authorized the company’s managers to look into “strategic alternatives” to boost shareholder value. The chain said that might include a sale, merger or financial restructuring.
CPK hired Moelis & Co., a Los Angeles investment bank, to provide the company financial advice. A CPK spokeswoman declined to comment further.
CPK shares, which had surged 14% on Friday on rumors that the company was putting itself up for sale, continued to rise Monday.
The stock closed up 33 cents, or 1.6%, to $21.07 after rising as high as $22.92 during the day’s session. The shares are at their highest level since 2007.
CPK warned that a sale or merger was not guaranteed. The company’s stock market value is about $500 million and the firm has little debt.
The company’s final results for the first quarter of 2010 are due May 6. It said Monday that its expectations for earnings per share would be 10 cents, up from its estimate in February of 5 cents to 7 cents a share.
CPK said revenue fell 2.7% to $156.7 million, compared with $161 million a year earlier. Still, the company saw the numbers as a sign of improvement from the 3% to 4% drop in sales it had previously predicted for the quarter.
“We are pleased that fundamentals continue to improve and we remain confident in our outlook for the future,” company founders and co-Chief Executives Rick Rosenfield and Larry Flax said in a statement.
Whatever happens with the company, it appears that the two founders and Chief Financial Officer Sue Collyns are expecting to stay with the chain. The company extended the contracts of all three for an additional three years.
Combined, Flax and Rosenfield own 7.8% of CPK’s shares.
Some analysts suggested that the company’s move to consider its financial options could mean the founders are looking for deep-pocket buyers to help expand the business.
Like other chain restaurants and fast-food eateries, CPK struggled over the last year or so with slumping sales as recession-wary Americans cut back on restaurant dining, opting instead to cook at home. In the fourth quarter of 2009, sales at stores open at least 18 months dropped 5.8%, with a net loss of 9.9%, prompting the company to lower its projections.
But in the first quarter, sales began to increase modestly, an improvement that the company attributed to the launch of a new call center, the expansion of its wine selection and catering program and the rollout of its new “small cravings” menu.
“So, we’ve seen store sales either improve or turn positive at a number of chains -- Kona Grill, J.Alexander’s, Ruby Tuesday and California Pizza Kitchen,” said Ian Corydon, a senior analyst at research firm B. Riley & Co.
And because sales are improving, Corydon said, the perception among investors is that the potential for future growth might be worth the risk.
For example, CKE Restaurants Inc., the Carpinteria, Calif., parent company of Carl’s Jr. and Hardee’s, is weighing dueling takeover offers, including one from private equity firm Thomas H. Lee Partners.
CPK owns most of its restaurants in the U.S., while franchisees control the 28 international sites, said Jeremy Cohen, an equity analyst at Morningstar Inc.
However, the company leases the vast majority of the properties where its restaurants are located, a strategy that has helped it avoid burdening itself with heavy debt, Cohen said. It owns the properties at only five locations, including two in Georgia and one each in Arizona, Illinois and Texas.
“That means the company isn’t tied down to those assets if the restaurant fails in a particular location,” Cohen said.
It also helps make CPK that much more attractive to investors because “if a potential buyer wants to restructure the business, it gives the buyer more flexibility in eliminating particular restaurants. You don’t have to worry about getting rid of property.”
The company was founded in Beverly Hills in 1985 by Flax and Rosenfield, two former federal prosecutors who abandoned a joint law practice to sell gourmet pizzas and salads.
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