CALIFORNIA PIZZA KITCHEN
Suggested Discussion Questions
1. Provide a brief description of California Pizza Kitchen.
California Pizza Kitchen (CPK) is a restaurants services company that operates a casual dining chain, with a particular focus on the premium pizza segment. The company is headquartered inLos Angeles, California and employs 14,800 people as on December 30th, 2007. The company recorded revenues of $633 million during the fiscal year ended December 2007, an increase of14.1% over 2006. The increase in revenue was driven from its full service restaurants, ASAP restaurants and from LA Food Show. The operating profit of the company was $22 million during fiscal ...view middle of the document...
3. How do you compare the performance of California Pizza Kitchen with other comparable restaurants based on data in Exhibits 4 and 7?
The California Pizza Kitchen seems to be about average with other comparable restaurants. Share prices seems to be mostly between 20-40 with the exception of Chipotle who has a much higher share price. Revenue seems to be lower than the other comparable restaurants. CPK does not seem to have as much debt as other restaurants but this could be because CPK is still a growth company, and is more equity based. Current assets seem to be lower than the others but this could also be because of the early stages of the company. Debt to capital is 0.0%, this is likely due again to the fact that CPK is a growing company and equity based. CPK store sales seem a little jagged as they go from 3.4 to 9.3 back down to 6.4, however these percentages do stay positive as some of the other comparable companies have negative store sales.
4. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital?
The operating leverage effect on ROE is the percentage change of EBIT is more than percentage change in sale. If the percentage change of EBIT is more than the percentage change in sales, this operating leverage will affect ROE positively because at this level, per unit fixed cost will decrease and small increase in sale will boost EBIT. If EBIT will increase, ROE will also increase. After dividing percentage change of EBIT with percentage changes in sales, we can take ratio of it and it indicates, how will change EBIT if changes will be done in sales. As interest is fixed cost, so with this ROE will increase.
A high operating leverage is not good and maybe high risky. While a low operating leverage may be useful when sale market is fluctuating. The effect of operating leverage is the percentage change of EBIT less than percentage change in sales.
5. Based on the analysis in case Exhibit 9, what is the anticipated CPK share price under each scenario? How many shares will CPK be likely to repurchase under each scenario? What role does the tax deductibility of interest play in encouraging debt financing at CPK?
The anticipated share price under each scenario in Exhibit 9, would be $20-$22.10. Because CPK used its proceeds from its 2000 IPO to pay off its outstanding debts, the company completely avoided debt financing. Repurchasing shares is one possible...