Earnings Scorecard: California Pizza Kitchen (CPKI)

California Pizza Kitchen Inc. (CPKI), a leading casual dining restaurant chain, reported second quarter 2010 earnings on August 5, 2010. The reported quarter’s earnings per share were in line with the Zacks Consensus Estimate of 17 cents per share.

Earnings Review

California Pizza Kitchen posted second quarter 2010 earnings of 17 cents per share, dropped 32.0% from 25 cents in the prior-year quarter.

The pizza restaurant chain said that total revenue for the second quarter plunged 4.6% year-over-year to $163.1 million, surpassing the Zacks Consensus Estimate of $162.0 million.

Comparable-store sales fell 5.9% in the quarter, lower than the year-ago period, but fared better than the guidance range of negative 6% to negative 7%.

In second quarter 2010, California Pizza Kitchen experienced a shortfall in its comparable store sales due to the absence of the “Thank You” Card promotion that boosted sales in the second quarter of fiscal 2009.

Read our full coverage on this earnings report: California Pizza Matches Estimates

Following the earnings release, the Zacks Consensus Estimate for the company have fallen, as the analysts covering the stock seem to have a negative view on the stock.

The casual dining operator expects its third quarter 2010 earnings in the range of 17 cents to 19 cents per share. Comparable-store sales are projected between negative 1.0% to positive 1.0% in third quarter 2010.

Agreement of Analysts

Analysts mostly remain cautious on California Pizza Kitchen. In the last seven days, out of 15 analysts, 8 have reduced their estimates and 2 analysts have raised their earnings estimates for fiscal 2010. For fiscal 2011, 7 of 15 analysts covering the stock have decreased their estimates, while 1 moved in the opposite direction.

Negative revisions by analysts are based on weaker sales outlook due to lower licensing revenues and absence of price increase in November menu rollout. Moreover, the analysts expect a slightly lower margin assumption due to higher selling and general administrative cost and depreciation and amortization expense. Additionally, they expect commodity costs to rise in 2011, as for year-end 2010, 90% of the company’s food requirements (except produce) have been contracted.

However, some analysts have increased their estimates as they expect comparable-store sales to improve, based on the initiatives taken by the company. In order to drive traffic, California Pizza Kitchen will reintroduce the thank-you card program, which has historically been a significant comp driver.

Moreover, in 2011, the analysts foresee improvement in licensing revenues as the company is working with Nestle (have a licensing agreement) to optimize the product portfolio and bring new innovation to the core pizza offering. The company is also planning to expand its licensed offerings to non-frozen items within grocery (including branded salad products and barbecue sauce) through a new agreement with prepared food provider Orval Kent.

Magnitude of Estimate Revisions

Earnings estimates have declined 2 cents to 60 cents for fiscal year 2010 and by 3 cents to 72 cents for fiscal 2011, over the last 7 days. The magnitude of estimate revisions indicates that the analysts were disappointed by the last quarter’s results and negative earnings trend is expected to continue in upcoming periods.

Our Recommendation

California Pizza Kitchen has implemented several sales-building programs to revive its top-line growth and falling comparable-store sales. These initiatives include new menu offerings such as Small Cravings menu, a new wine list featuring over 30 distinctive wines, a centralized Call Center to serve customers’ off-premise dining orders, as well as a catering program. The company also intends to focus on operational efficiencies in order to drive restaurant margins. The financial condition of the company is also sound with debt free balance sheet.

We remain cautious on the stock as comparable-store sales and traffic have sagged given that budget- constrained consumers are trading down to lower-priced dining options. Additionally, competition among casual dining restaurants is expected to remain fierce with respect to price, service, location and concept in order to drive traffic, which may adversely affect California Pizza Kitchen’s restaurant operating margins and profits.

Accordingly, we keep our conservative view on California Pizza Kitchen shares and maintain a Zacks #4 Rank, which translates into a short-term Sell recommendation. Our long-term recommendation for the stock remains at Neutral.

Apart from California Pizza Kitchen, another stock that promises long-term growth opportunities is BJ’s Restaurants Inc. (BJRI), which has a short-term Zacks #2 Rank (Buy) rating, as BJ’s second quarter earnings of 23 cents topped the Zacks Consensus Estimate of 20 cents.

CALIF PIZZA KIT (CPKI): Free Stock Analysis Report

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