California Pizza Kitchen Inc. serves up lower guidance
Shares of California Pizza Kitchen Inc. (Nasdaq: CPKI) are trading lower today after the restaurant owner operator downwardly revised its guidance in an earnings report Thursday evening.
Adding to the sour sentiment, Friedman Billings Ramsey today lowered its target price to $23 from $26, but reiterated its rating of “outperform” on the stock.
Friedman Billings Ramsey analyst Ashley Woodruff reduced her target price on account of a lower assumed P/E multiple based on weaker-than-expected third quarter-to-date same store sales. According to Woodruff, comps rose only 3%, versus 5.4% in the second quarter, and are currently up 4.7% in the first week of August. Woodruff said that California Pizza Kitchen’s July comps were better than the industry in which it operates, but nevertheless disappointing.
“We expected a guide-down because of higher cheese and labor costs, but the softer sales were a surprise,” Woodruff wrote in a research note.
California Pizza Kitchen CEO, Rick Rosenfield told CNBC in an interview this afternoon that, “July had softer traffic than we’ve experienced in four years, but, we’re far better insulated than most because of our higher income demographic. In fact, we’ve seen a rebound in comps in California in the last 10 days.”
The company also gave guidance for the third quarter of 2007 late Thursday. The restaurant owner-operator said it intends to add six full service and one international franchise restaurants. Based on the new restaurant openings, a comparable restaurant sales increase of 2%-3% and an estimated $0.19 per diluted share charge primarily associated with store closure costs for four restaurants, the company is forecasting third quarter earnings per diluted share of $0.03-$0.04. The consensus of nine analysts on the Street was for earnings of $0.25 per share.
For the full fiscal year, California Pizza Kitchen downwardly revised earnings guidance to $0.79 to $0.83 per diluted share, from previous guidance adjusted for a three-for-two stock split the company made effective on June 19 of $0.87 to $0.89. The consensus of nine analysts surveyed by Thomson Financial was for earnings of $0.85 per share.
Woodruff said she views the new guidance as “extremely conservative.” According to Woodruff, historically, California Pizza Kitchen guides conservatively, and given volatility in July, she said she believes the company took a very conservative approach to its latest guidance.
Leading up to Thursday’s financial update, California Pizza Kitchen’s share price was more buoyant, closing at $20.05 Thursday, but since then shares have slid roughly 5% on the newly revised guidance. Woodruff recommends getting in on the current weakness.
“…we recommend buying the stock on weakness as we think CPKI is likely to exceed these estimates and do not believe there is another shoe to fall,” wrote Woodruff.
Long-term, Woodruff expects California Pizza Kitchen will boost its margins and returns, through a stronger growth of its licensing revenues. According to Woodruff, licensing revenues grew 27% in the second quarter, and should contribute about 24% to pro forma operating profit in fiscal year 2007, compared with 22% last year.
The stock also trades at a significant discount to its peers, according to Woodruff.
In addition to revising guidance, California Pizza Kitchen authorized the repurchase of up to $50 million in shares over the next two years.
Shares of California Pizza Kitchen were down $1.18, or 5.89%, to $18.87 Friday afternoon.
