Expansion strategy playing role in CPK profit squeeze. (Corporate Focus).

SHARES of California Pizza Kitchen Inc. (Nasdaq: CPKI) have been tossed to and fro over the past six months, enduring five swings of $5 or more. It fell as low as $14.21 on Sept. 21 and rose as high as $26.07 on Jan. 7. Recently, it's been trading at $19.66.

Other local restaurant chains, such as Cheesecake Factory and IHOP Corp., have been steadier performers, and it's partly because of CPK's growth strategy.

CPK, a turnaround project discarded by PepsiCo in 1997, is considered to be well managed, but it embarked on a growth spurt just as last year's recession kicked in. The company opened 16 restaurants in 2001 after opening only eight in 2000. The restaurant count is now at 129, concentrated most heavily in Southern California.

With more stores open, fourth quarter sales grew by 22 percent -- but comparable sales at restaurants open one year or more rose by only 2 percent Net income fell to $3.2 million, or 17 cents per diluted share, vs. $3.3 million (18 cents) in the like year-earlier period.

"They're growing their square footage by 25 percent a year, but earnings are flat," said Greg Schroeder, an analyst with Fulcrum Global Partners in New York.

On Jan. 16, Schroeder slapped a "sell" rating on California Pizza Kitchen, just as a post Sept. 11 rally among restaurant stocks began to wear off. CPK's stock was trading just under $24.

"We had a rally in a lot of the restaurant stocks, and the entire group was moving up indiscriminately," Schroeder said.

Another factor in Schroeder's sell rating was the pending sale of stock by its largest shareholder, the leveraged buyout firm of Bruckmann Rosser Sherill & Co. Bruckmann acquired CPK from PepsiCo and then took it public in 1998. It had filed to sell its 12 percent position last August, but the markets weren't cooperating. With the stock higher in January, Schroeder expected Brackmann to revive its liquidation plans, exerting selling pressure on CPK's stock.

On Feb. 21, after Bruckmann sold two-thirds of its stake and CPK's stock fell to $19.80, Schroeder suspended his sell rating. (Fulcrum Global ratings are shorter-term than those of most Wall Street analysts, and geared toward an opportunistic, institutional clientele. If the analyst doesn't have a strong opinion, coverage is dropped.)

CPK Chief Executive Fred Hipp said he doesn't think Fulcrum Global is representative of the investors that own the company's shares. "It's a trading call and I don't think it had any credibility," Hipp said. He acknowledged that the fourth quarter got off to a bad start after Sept. 11. "Just like the entire industry, we got hit pretty hard, but I can tell you we recovered pretty quickly. We're pretty close to normal levels (of sales) right now," he said.

Hipp said the cost of opening new stores played a role in the profitability squeeze. He said the company spends an average of $175,000 on each new store, including training, non-depreciable supplies, giveaways and discarding food that doesn't measure up to standards.

Profit margins at the new stores take about 90 days to reach company norms, and in the fourth quarter, six new stores were opened, a pace that rattled analysts. Two of those were early openings that were scheduled to take place in 2002, Hipp said.

There are plans to open 17 stores this year, instead of the 19 originally slated. Hipp also said the company would increase its restaurant count by 20 to 25 percent in 2003. "In no case will we exceed 25 percent," he said. "That seems to be a rule of thumb in this industry for a company of our size."

Even analysts who are positive on California Pizza Kitchen admit its most difficult task is staying on track as it grows.

"To me the principal challenge for expanding a restaurant franchise is just being able to find the right people, attract and retain the people you need and keep the customers coming back," said US Bancorp Piper Jaffray analyst Allan Hickock.

Hickock has an "outperform" rating on the stock, and owns it. Piper Jaffray has strong ties to the company, having acted as an investment banker on a recent equity offering.

Hipp said first quarter comparable-store sales are running slightly ahead of expectations. Those expectations, though, are only for a 1 percent increase. As for profits, Hipp said his objective is to raise operating margins systemwide to 20 percent of sales, from 19.6 percent. With the Bruckmann overhang gone, he said, "I think it's a pretty good buying opportunity, quite frankly, right now."

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California Pizza Kitchen Inc.

Stock Prices

YEAR (Dec. 31)                    2001     2000

Revenue (millions)             $249.3   $210.8
Operating Expenses (millions)   229.5    196.5
Operating Income (millions)      19.7     14.3
Net Income (millions)            13.2      8.4
Earnings Per Share               $0.71    $0.35

Note: Table made from line graph

Quarterly Net Income (Loss) (millions)

SUMMARY

Business: Operates casual dining restaurant chain

Headquarters: Los Angeles

CEO: Frederick Hipp

Market Cap: $356.6 million

* Total Liabilities: $23.5 million

* Long-Term Debt: $0

Dividend Yield: N/A

P/E Ratio: 27.7

* As of Sept. 30, 2001, company has not filed a 10K

Financial editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at [e-mail].