In Focus

California Pizza from a California Chick

CPK had an IPO! Who had a WHAT??? Untwist your feathers and lemme 'splain, Lucy! On 8/2/2000, one of my favorite restaurant chains finally went public. You too can finally own more than just a fabulous piece of pizza from the California Pizza Kitchen! You do know the place, don't you? Their yellow, black and white logo can usually be found in malls, although not always, and even in some airports. I remember frequenting their original location on Beverly Blvd. in Beverly Hills, drooling over their Barbecue Chicken Pizza (okay, maybe it was the gorgeous waiters. LA has some of the cutest wannabe actor/waiters around!). Talk about a leader in its field. I swear they created the original gourmet pizza! Finally someone was daring enough to put something on a pizza besides tomato sauce! Founded in 1985, Co-chairmen Rick Rosenfield and Larry Flax have topped their pizza dough with just about everything, from a tostada to a BLT!

In case you missed Chick Karin's oh-so informative article a couple days ago, having had an IPO meant for the first time (initial), you and I (the public) were given the offer to buy stock in CPK. Oh, how I love to be included! Be sure not to confuse this with a secondary offering, where an already public company is simply offering more stock. A company can only have an IPO once, kinda like a Chick can only lose her. no, I won't go there, but you get the idea! Usually an IPO comes from a newer company, some sort of upstart that you've never heard of before. Take Yahoo. Ever hear of them prior to their IPO in 1995? Probably not. Sometimes, however, a much more established company decides to go public, like UPS, or in this case, CPK. They already have over 100 restaurants in the United States, Malaysia, Singapore, and the Philippines.

Companies choose "to go public" or offer stock for several different reasons, but the main one is to raise money. In the case of CPK (Nasdaq: CPKI), they hoped to raise over $70 million dollars to repay $40 million in bank debt - oh, how Chick's love getting rid of debt! They also want to buy back outstanding preferred stock (different than the "common stock" they're offering, but don't worry about it) and to use the rest for other general corporate purposes. Well, well, well, they can check item #1 off their "to do" list! From the most recent quarterly numbers available (10/00), I see that the company has zero debt, short or long term. bravo! Speaking of numbers, the others aren't so bad either. Gross and net margins come in at 21% and 5.8%, respectively, and their flow ratio is a beautifully low .29!

Surprisingly, the company cites its two biggest challenges in meeting growth to be attracting and keeping employees and securing an adequate supply of suitable new restaurant sites. These are both weird to me. Given the low unemployment rate, I can see that attracting new employees might be somewhat difficult, but keeping them? Is this not a great place to work? And how about that second concern regarding the problem of new locations? Are they kidding? They're only in 22 states out of 50 in the US! Of the 110 outlets, almost half are in California! They have just four stores in those three countries in southeast Asia. And I would think Japan would go nuts for this type of thing. I bet they'd make a mint in t-shirt sales with their little palm trees and the words California Pizza Kitchen! Or how about the UK? Hopefully, their caution will serve them well. The company must have learned its lesson in the early '90's, when it was bought by PepsiCo and expanded far too rapidly. In the restaurant world, it's the companies that chirp the tune of slow growth that investors favor.

They certainly seem to be headed in the right direction. In 1998, CPK hired a new CEO, Frederick Hipp, who has shifted the company's focus from investing in new stores to customer satisfaction. They have radically slowed their growth, opening only 5 stores in 1999 and, just over a year ago, hired a chief development officer with a real estate background to assist in future expansion. They postponed their original IPO date, December 1999, to summer 2000 because investors seemed to be a bit smitten with tech stocks and gun-shy about restaurant stocks, due to the under-performance of Planet Hollywood International and Darden Restaurants (operators of Olive Garden and Red Lobster chains). As they say, timing is everything!

The postponement proved right for a combination of reasons. As we all know, tech stocks sort of flew south for an early winter, which is good news for a non-tech new issue. Investors may have been left feeling even more excited about a profitable company in a traditional sector. In addition, other recent investing successes, such as P.F. Chang's China Bistro, The Cheesecake Factory and Krispy Kreme's IPO may have all provided an added boost for CPK. I think what pleases me the most is that management seems to have learned from past mistakes and has regained its focus. Although the numbers aren't quite up to our Chick standards, I think it's a terrific restaurant stock that's worth following. So the next time you're cursing your tech-heavy portfolio, remember this delicious little stock is both profitable and has a huge potential for growth, which is a lot more than many of those dot-comers can say!