California Pizza Kitchen - case essay
Executive Summary
California Pizza Kitchen (CPK) was founded in 1985 by Larry Flax and Rick Rosenfield with a vision of offering customers designer pizza at reasonable prices. CPK’s target market is geared towards affluent customers making $75,000 annually, and over the span of 2 decades the business was able to grow from a single location into 213 locations across 28 states and 6 foreign countries. CPK generates revenue from 3 main sources: company restaurants, franchises, and royalties. CPK stands out from its peers because it offers a compelling menu at low prices, does virtually no marketing, and currently generates profits using zero debt.
Despite CPK’s positive growth projections, the food industry at the end of 2007 is experiencing increased pressure from higher commodity prices, increasing wages and lower consumer discretionary income. Over the last 2 years we were able to grow sales by 16% while decreasing labor by .03% in the same period. Despite our strong performance we are currently being pressured by institutional investors to take on additional leverage and re-buy outstanding shares in response to a 10% decrease in our stock price.
To determine if levering the firm would be beneficial I decided to evaluate the benefits of leverage by doing different scenario analysis based on different debt structures 10% - 100% leverage. What I found in my analysis was that as we leverage the firm there are many benefits that we are missing out on such as a larger tax shield, increased ROE and disciplined growth effect. On the negative side; there is also the chance that we run into trouble and it may put a squeeze on project spending and in the most unlikely case land us in bankruptcy if we are not careful. It is my recommendation that we should lever the firm by 30% of debt which should yield us a tax savings to us of roughly $1.35mm per year and boost our ROE to 11.05%. Case Analysis California Pizza Kitchen (CPK) is a homemade style pizza company
California Pizza Kitchen (CPK) was founded in 1985 by Larry Flax and Rick Rosenfield with a vision of offering customers designer pizza at reasonable prices. CPK’s target market is geared towards affluent customers making $75,000 annually, and over the span of 2 decades the business was able to grow from a single location into 213 locations across 28 states and 6 foreign countries. CPK generates revenue from 3 main sources: company restaurants, franchises, and royalties. CPK stands out from its peers because it offers a compelling menu at low prices, does virtually no marketing, and currently generates profits using zero debt.
Despite CPK’s positive growth projections, the food industry at the end of 2007 is experiencing increased pressure from higher commodity prices, increasing wages and lower consumer discretionary income. Over the last 2 years we were able to grow sales by 16% while decreasing labor by .03% in the same period. Despite our strong performance we are currently being pressured by institutional investors to take on additional leverage and re-buy outstanding shares in response to a 10% decrease in our stock price.
To determine if levering the firm would be beneficial I decided to evaluate the benefits of leverage by doing different scenario analysis based on different debt structures 10% - 100% leverage. What I found in my analysis was that as we leverage the firm there are many benefits that we are missing out on such as a larger tax shield, increased ROE and disciplined growth effect. On the negative side; there is also the chance that we run into trouble and it may put a squeeze on project spending and in the most unlikely case land us in bankruptcy if we are not careful. It is my recommendation that we should lever the firm by 30% of debt which should yield us a tax savings to us of roughly $1.35mm per year and boost our ROE to 11.05%. Case Analysis California Pizza Kitchen (CPK) is a homemade style pizza company