Citing "poor real estate choices" and a growth strategy needing revision, officials of California Pizza Kitchen told analysts listening to a second quarter investor conference call that the chain remains solidly profitable, though many challenges lie ahead.
The June 24 call included the introduction of the company's new interim president, H.G. "Carey" Carrington, Jr. (CPK's former executive vice president and chief financial officer from 1998-2001), and the announcement that Richard Rosenfield and Larry Flax, co-founders and current co-chairmen of the board, will now serve as co-chief executive officers.
The managerial shift was made following the June 24 resignation of board member and CEO Fred Hipp. Hipp, the former CEO of the Houlihan's restaurant chain, held CPK's CEO post since 1998.
Though not plainly stated during the call by CPK officers, Hipp's resignation likely was related to the company's flawed expansion strategy.
CPK officials did, however, speak candidly about the company's struggle with real estate site selection. Rosenfield said the company entered too many "green markets" in the recent past that haven't generated hoped-for revenues and traffic.
According to CFO Greg Levin, while the strongest of the company's 159 restaurants produce annual sales in excess of $3 million, an unspecified number of units are in the $1.7 million range and below expectation.
"We will not grow for growth's sake," said Rosenfield after telling analysts CPK will open just 12 units in 2004, about half the number it's opening this year. CPK "does great in great malls ... and we got into a problem going into some green malls."
Rosenfield said he and Flax will hit the streets themselves in search of quality restaurant sites, something the pair did when they founded the company in the mid-1980s.
Later, when the company was owned by PepsiCo., Rosenfield said opening lots of units very quickly was mandated by the soda giant, and the harried growth pace hurt operations.
Following CPK's spin-off from PepsiCo and later IPO, Flax and Rosenfield curbed growth rates to about 25 units a year. But even now, the pair hinted that such expansion may be too much to sustain while maintaining high operational standards.
The mistake of putting the growth horse before the operations cart, Rosenfield added, can't be made again. "If we do not learn from history, we're condemned to repeat it."
New menu, higher prices
Levin said CPK's cost of sales could rise more than 1 percent in the coming months as the cost of key commodities, such as cheese, continue rising.
When questioned about whether CPK would examine hedging strategies (the purchase of milk futures or options) to buffer cheese price increases, Levin said instead that CPK had pursued forward contracting (long-term purchase commitments in trade for favorable prices), which its supplier would not do.
For now, the company will take what the cheese market dishes out, he said, adding that CPK's procurement personnel believe block prices will peak at $1.65.
While Levin predicted a same-store sales increase range of 1 percent to 2 percent for the rest of 2003, Rosenfield said he hoped the introduction of the chain's fall menu in September (the intro traditionally is done in November) will spur traffic.
The menu is likely to include some subtle price increases, which were tested successfully at a handful of restaurants around the country.
CPK is debt free and continues to generate strong operational cash flow, and its officers have promised revenue growth of at least 15 percent for the next year.
However, Wall Street responded to the company's report with an after-hours sell-off on June 24, which continued into early trading on June 25. By 10:30 a.m., EST, CPK's share price had dropped 17.8 percent to $16.57.