Returning duo puts out fires as restaurant chain recovers.

CALIFORNIA Pizza Kitchen Inc. continues to cook up perennial favorites such as its Original BBQ Chicken Pizza and Kung Pao Spaghetti--but its stook is getting most of the rave reviews these days.

Shares have risen more than 15 percent to a 52-week high of $32.42 since the Los Angeles-based restaurant chain raised its second-quarter profit projections by more than 20 percent. At least three analysts have upgraded the stock.

Though CPK always captured a loyal following in Southern California, the chain struggled with expansion plans that threatened its profitability. CPK's board turned to co-founders Larry Flax and Rick Rosenfield to revive the chain in 2003 after a clash with former Chief Executive Fred Hipp over the chain's real estate strategy.

"They've done a terrific job of getting better locations, renegotiating leases and upgrading management," said Dennis Forst, managing director of research at KeyBanc Capital Markets, a unit of McDonald Investments Inc.

Forst raised his rating to "aggressive buy" from "hold" based on its expansions, new store prototype and higher same-store sales. In the first quarter, same-store sales rose 9 percent, compared with an 8 percent rise in 2004, the company's turnaround year.

Rosenfield, who is co-chief executive with Flax, blames Hipp for picking lousy real estate locations that moved the popular California eatery too far from its roots. The founders spent their first year back identifying ways to improve 40 underperforming restaurants that were opened between 2002 and 2003 and were dragging down overall performance.

"It was quite apparent that this was a real estate issue because the 94 mature CPK restaurants that were built before 2002 were doing better than ever," said Rosenfield. "They were putting restaurants in demographic areas that just were not strong for us."

Law to ladles

Exotic pizza wasn't new when Flax and Rosenfield, two former assistant U.S. attorneys in Los Angeles, opened the first CPK restaurant in Beverly Hills in 1985. But the chain quickly earned a reputation for its large menu, reasonable prices and efficient service.

Its bizarre combination of toppings, such as the newly created pear and gorgonzola salad plopped on top of a pizza, continues to generate traffic. CPK competes with chains such as Cheesecake Factory Inc., based in Calabasas, and PF Chang's China Bistro Inc., based in Scottsdale, Ariz.

Rosenfield, whose expertise is in real estate, and Flax, who creates new menu items at the chain's test kitchen in Redondo Beach, have been spending most of their time on the next phase of growth: developing a 5,700-square-foot prototype at the chain's locations on the Sunset Strip and in Irvine, while also expanding abroad with their first restaurant in Shanghai.

The yellow-tile theme that was so popular for the 1980s lunch crowd will be replaced with granite counters, a full bar and flat-screen TVs. The chain now has 40 specialty drinks on its menu, including CPK's original California Cosmo, and a long list of martinis and margaritas. Older restaurants such as those in Beverly Center and Studio City--both closed for remodeling--will include elements of the new look.

"We're trying to create more of a destination night-time business without having an impact on lunch sales," said Rosenfield.

There are plans to open 15 restaurants in 2005 and more than 20 in 2006, compared with just three new openings last year. More than half of the new restaurants will be built in California, in both free-standing and mall locations.

The chain plans to expand its second concept, ASAP, which has 24 restaurants that are significantly smaller and offer a limited menu. CPK also has a strategic alliance with Kraft Pizza Co., a unit of Kraft Foods Inc., which distributes a line of premium pizzas to supermarkets and other retailers.

One challenge is the higher expenses for remodeling and new store construction, which puts pressure on profit margins.

Andrew Barish, an analyst at Banc of America Securities in San Francisco, said CPK has not shown much margin expansion despite strong same-store sales gains. "The company operates in a competitive market environment with difficult labor and real estate conditions," he wrote in a recent research report. "The ability to sustain same-store sales gains will be important."

The partners, who each own about 5 percent of the chain's shares, each signed five-year employment contracts calling for $915,000 a year in salary and bonus plus 400,000 stock options.

California Pizza Kitchen Inc.

Stock Prices

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Quarterly Net Income (millions)

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YEAR (Jan. 5)                    2005       2004

Revenue (millions)             $422.5     $359.9
Total Expenses (millions)       397.4      354.3
Operating Income (millions)      25.1        5.6
Net Income (millions)            17.7        5.6
Earnings Per Share               $0.92      $0.42

SUMMARY

Business: Casual dining chain
Headquarters: Los Angeles
CEOs: Rick Rosenfield, Larry Flax
Market Cap: $623 million   Dividend Yield: None
Total Liabilities: $79.5 million   P/E Ratio: 34.7
Long-Term Debt: $0

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].