Pizza chain's founders return with new focus on California.

Some homecomings are easier than others. For Rick Rosenfield and Larry Flax, the former federal prosecutors who cooked up a way to popularize gourmet pizza, the return to California Pizza Kitchen Inc. came only after miscues prompted the company's chief executive to step down.

Vowing that they have "learned our lesson the first time around," Flax and Rosenfield sound like entrepreneurs running a private company, not one with institutional shareholders and a market cap of $341 million.

"You can't run a brand like California Pizza Kitchen from quarter to quarter," Flax said. "That's the kind of short-term thinking that got the prior management into trouble."

But as long as the Los Angeles-based company remains in public hands, Wall Street will be involved--and for now, Wall Street is wary.

The return of Flax and Rosenfield as co-chief executives on July 24--they had remained co-chairmen of the company they founded in 1985--was met with a July 25 sell off that drove its share price down to a 52-week low.

After their first 100 days back on the job, they are sharply cutting back the number of stores next year to around a dozen, compared with 22 that are projected for 2003--a big turn-about for a chain whose long-standing goal had been to increase the store base by 20 percent annually. The company reported that several restaurants opened in the past year-and-a-half are struggling because of poor locations and five may close.

It's a familiar story for fast-growing regional restaurant chains that go public and then need to keep expanding nationally and internationally in order to maintain their sales numbers. But the corporate infrastructure for such expansion is often missing and inevitably mistakes get made.

"People on the Street are disappointed to hear how poorly the new stores are doing," said Dennis Milton, an equity research analyst with Standard & Poor's. "It caught people by surprise."

While the reinstalled management team inherited the poor financial results, putting on the brakes didn't win them friends either. "They were expanding the concept rapidly," said Milton. "The announcement they were going to scale back their expansion really hurt the company's image in the short term."

Rosenfield and Flax plan to decentralize operations, like maintenance and training, and will shift real estate responsibilities to regional brokers. The moves will increase expenses by several million dollars annually, they said, but it will also allow the company to flex more local control over its units. Its new focus will be on California.

"We know it's about finding the right locations, not how many restaurants we open," Rosenfield added. "We're never going to be led by a need for numbers. We've been through that twice--never again."

But at a price. The company recast its April earnings estimate because of poor performance, prompting four of the 11 analysts who track the company to downgrade their recommendations. After the most recent quarterly report, RBC analyst David A. Geraty derided CPK for "a lack of clarity within the business."

Starting small

The story behind California Pizza Kitchen has become a favorite in local entrepreneurial circles: two attorneys looking for a way to get out of law and recognizing the viability of taking gourmet pizza mainstream. Flax and Rosenfield developed their own recipes in a tiny Beverly Hills storefront--except instead of the usual red-checked tablecloths and Chianti bottles, they opted for a sleek white and yellow tiled decor. "We did for pizza what Baskin Robbins did for ice cream," Flax has said.

The real spurt came in 1992, when PepsiCo Inc. bought a 67 percent stake for an estimated $60 million to $70 million and gave Rosenfield and Flax a blank check to open as many restaurants as they could muster. "We opened 23 locations one year," Flax recalled, "and Pepsi wanted to know why we didn't open 50."

But in 1997 Pepsi decided to get out of the casual dinning business and sold its stake to New York investment firm Bruekmann Rosser Sherrill & Co. Inc., which nudged Rosenfield and Flax to the sidelines in 1997 in favor of Fred Hipp, a former Houlihan's Restaurants Inc. executive who took over as chief executive.

Hipp responded by cutting overhead and pushing rapid expansion in preparation for an initial public offering in 2000. At the time the emphasis on growth made sense--until average weekly sales at the newer restaurants fell substantially below that of the older venues. Hipp resigned as CEO and Flax and Rosenfield went back to running the company.

While their immediate plan is to cut back on the number of new restaurants, Rosenfield and Flax say they want to expand the number of concepts that California Pizza Kitchen operates.

They are in negotiations to repurchase the rights to California Pizza Kitchen ASAP, a grab-and-go version of CPK licensed to Caruso Affiliated Holdings, and they have begun incorporating LA Food Show, another casual dinning concept the pair launched in Manhattan Beach a month before unexpectedly retaking the company's helm.

"There should be no doubt in anyone's mind that our core business is CPK," Rosenfield said. "But you don't get big on just one good thing," added Flax. "We can moderate growth of CPK by broadening our shoulders."

Marketing plans

In addition, they propose tweaking the core brand by renovating the layout. One of the first prototypes will be in Pasadena, where a store is being expanded to 6,000 square feet to accommodate a full bar and add more space between tables. The idea is to increase the chain's alcohol revenues, which currently account for about 6 percent of total retail sales, according to Rosenfield.

They are also breaking a longstanding avoidance of advertising.

"Despite the renowned cost of doing business in California, it remains a great place for us to invest our money and generate sound returns for our shareholders," Rosenfield said. "There's no place else where there are so many great locations with the income and spending levels you have in California."

Part of the overhaul is likely to involve LA Food Show, the fledgling grill-like spinoff that Flax and Rosenfield have been working on for the past year. Hipp wasn't interested in the concept, but the company's board approved taking a minor stake in exchange for first negotiation rights to buy out the concept at a later date, according to Rosenfield.

Rosenfield and Flax, who together own 7.1 percent of California Pizza Kitchen's outstanding shares, own 76 percent of LA Food Show. The balance is held by California Pizza Kitchen.

"We want to grow the company into something much bigger," said Flax. "We're working 18-hour days but loving every second of it."