Stock of the Day - January 27, 2009 - CPKI

California Pizza Kitchen, Inc. (CPKI)

California Pizza Kitchen (CPKI), commonly referred to as CPK, is a casual dining restaurant chain with a particular focus on the premium pizza market.  As of January 14, 2009, the company operated a total of 252 locations, of which 204 were company-owned and 48 were operated under franchise agreements.  The company is based in the United States (California), but it has stores in over 8 foreign countries.  Just last week, CPK opened its first Middle East location, as it opened a restaurant in Dubai, United Arab Emirates.

Although it would seem fair to say that a casual dining restaurant would not be a great investment during a recession, as many potential customers do not have the money to spend at restaurants in harsh economic times, there are actually many positive factors that make CPK an intriguing investment.   

The first aspect of CPK that makes it appealing is the fact that it is a relatively affordable casual dining restaurant.  So, even though we are currently in a recession, the prices at CPK are not high enough to turn away everyone except for the people who have been hit the hardest by the economic downturn.  The average dine-in guest only spends a shockingly low $13.37 (including alcoholic beverages).  So, for a family that wants to eat out at a casual, sit-down restaurant, CPK is definitely a very affordable option.  I believe the fact that CPK is so affordable makes it a company that can actually continue to succeed, even today. 

Another factor that is intriguing about CPK is that the company continues to increase its profit margins.  This phenomenon is more of a macroeconomic shift that has affected almost all restaurants.  For most of 2008, raw food costs increased due mostly to higher oil prices.  So, in response to the higher food costs, most restaurants reacted by increasing prices on their menus.  But, as the economy has tanked and oil prices have dropped, the raw costs of food have declined.  In response, though, restaurants have not dropped their menu prices along with the falling food costs.  As a result, they are charging a higher price for food that is costing them less.  Thus, restaurants such as CPK will enjoy higher profit margins in 2009, a great piece of news for any business.

As most of you know by now, CPK sells frozen pizzas in many grocery stores.  The pizza company actually has joined in an alliance with Kraft Foods (KFT), the company that manufactures the frozen pizzas, and currently sells its frozen pizzas in all 50 states in over 17,000 outlets.  CPK’s frozen pizza sales are extremely profitable for the company, but the exposure that CPK receives from its frozen pizzas also greatly helps the company’s brand recognition and image. 

The thing that makes me the most excited about CPK is the fact that the company just recently raised its 4^th-quarter outlook above analyst estimates.  Analysts were expecting a profit of 7 cents per share, but CPK came out and said that it will likely earn between 8 cents and 10 cents a share.  While this may seem like a puny difference (which it is), the fact that a casual dining restaurant was able to post a profit and beat estimates in the heart of a recession says a lot about the resiliency of the company, even when consumers are most hesitant to spend their dollars. 

I believe that CPK is a very solid company that still has a lot of room to grow.  With its solid food, affordable prices, popular frozen pizzas, and overseas and domestic growth potential, I think the company has a great future ahead of it.  As the recession begins to end and the company can begin to focus more on growth, CPK could potentially be a great investment.  If you don’t already own a restaurant company in your portfolio, you should definitely look into CPK.

 

Niki Pezeshki

College Trillionaire