California Pizza Kitchen Case Study on Capital Structure/Leveraging Debt
A company's capital structure is a very important component of a company's financial health and longevity. The capital structure should maximize total net profit and overall shareholder wealth. An optimal proportion of equity and debt as a company's capital structure is an indication of a well-managed and successful company and should be a goal for most corporations.
Beverly Flax and Rick Rosenfield founded California Pizza Kitchen (CPK) in 1985 in Beverly Hills, California. It is a casual dining, full service restaurant concept that specializes in gourmet pizzas with unique topping combinations. They operated 213 locations in 28 states and 6 foreign countries by the end of the second quarter of 2007. Almost all of the firms revenue come from company-owned restaurants sales (98.8%), with only 1.2% coming from royalties generated by franchised restaurants and a partnership with Kraft Foods to sell CPK-branded frozen pizza in grocery stores (Bruner, Eades & Schill, 2010). Although the economy as a whole has been sluggish as consumers attempt to save money by eating at home, California Pizza Kitchen stands out from its competitors as it attempts to gain market share. Restaurant analysts have projected a five-year compound annual growth rate of 6.5% for the restaurant industry as a whole (Bruner, Eades & Schill, 2010). At the end of 2006, CPK’s sales growth rate was 15.6% while the average industry growth rate was 5%, meaning CPK’s growth rate was approximately 10.6% higher than industry average. Despite strong growth, the company’s share price declined 10% to a value of $22.10 due to economic issues as a whole. Due to the decline, CPK’s management is considering buying back shares through a stock repurchase program as they feel the stock is undervalued at the current price. A look at CPK’s balance sheet from the 1st quarter of 2007 shows cash, cash equivalents and other receivables make up only 5.3% of total assets. With such a small amount of cash on hand,
Beverly Flax and Rick Rosenfield founded California Pizza Kitchen (CPK) in 1985 in Beverly Hills, California. It is a casual dining, full service restaurant concept that specializes in gourmet pizzas with unique topping combinations. They operated 213 locations in 28 states and 6 foreign countries by the end of the second quarter of 2007. Almost all of the firms revenue come from company-owned restaurants sales (98.8%), with only 1.2% coming from royalties generated by franchised restaurants and a partnership with Kraft Foods to sell CPK-branded frozen pizza in grocery stores (Bruner, Eades & Schill, 2010). Although the economy as a whole has been sluggish as consumers attempt to save money by eating at home, California Pizza Kitchen stands out from its competitors as it attempts to gain market share. Restaurant analysts have projected a five-year compound annual growth rate of 6.5% for the restaurant industry as a whole (Bruner, Eades & Schill, 2010). At the end of 2006, CPK’s sales growth rate was 15.6% while the average industry growth rate was 5%, meaning CPK’s growth rate was approximately 10.6% higher than industry average. Despite strong growth, the company’s share price declined 10% to a value of $22.10 due to economic issues as a whole. Due to the decline, CPK’s management is considering buying back shares through a stock repurchase program as they feel the stock is undervalued at the current price. A look at CPK’s balance sheet from the 1st quarter of 2007 shows cash, cash equivalents and other receivables make up only 5.3% of total assets. With such a small amount of cash on hand,
References: Brigham &Ehrhard (2011). South-Western cengage learning. Financial Management. 13th edition. Hall, J. (2011) California Pizza agrees to $470 mln buyout. Retrieved from http://www.reuters.com/article/2011/05/25/californiapizzakitchen-idUSN2510425120110525 Official web site www.cpk.com. Retrieved from http://www.cpk.com/faqs/