California Pizza Kitchen

California Pizza Kitchen

California Pizza Kitchen is known to be a slightly upscale version of a pizza shop. Their motto promising “designer pizza at off-the-rack pries” brings in a wealthier crowd, while keeping the bill on the low side. CPK was started by criminal defense attorneys Larry Flax and Rick Rosenfield. Inspired by the great chef, Wolfgang Puck, they opened their first shop in 1985 in Beverly Hills, California. At the time where this case is being analyzed, in July of 2007, there were 213 shops in 28 states in 7 different countries. It should be noted that 41% of the shops were in California.

CPK had three sources of revenues from company owned restaurants, royalties from franchises, and a partnership with Kraft Foods. Overall, the company was striving in difficult economic times. They broke quarterly records and were on track with projections while rival companies were experiencing loses. The economy was experiencing higher gas prices, a failing housing market, and increased minimum wages and commodity prices. Even though CPK was doing so well in a bad market, their stock dropped by 10% in June.

CFO Susan Collyns can do a few things to ensure the success of CPK. One recommendation would be to increase spending on advertising. CPK only spends 1% of sales, which is low compared to competitors. Another recommendation I would make is for CPK to increase leverage and repurchase stocks.

Debt effectively increases the expected rate of return on equity. Leveraged investments are riskier causing the expectancy of a higher return. There will be an added risk premium to counterbalance this risk. There is a certain amount of debt a company should go up to, however. If a company is completely funded by debt for something, the expected return may be higher than CPK can deliver. Also, the loss will be more drastic if the business plan to pay back the money fails. Leverage can act as a tax shield, however, due to interest being tax deductible. The...