California Pizza Kitchen Case 33

Abstract

California Pizza Kitchen (CPK) is a full service restaurant in the casual dining segment. In the month of June (2006), CPK’s share price has dropped 10% to $22.10. CPK is discussing several ways to increase the share price, keeping the current economic situation in mind, and all the while staying within their capital structure boundaries. This paper will discuss some of the economic issues that CPK is currently facing. The paper will also provide an analysis of CPK’s capital structure, its pro’s and con’s, some alternative solutions, and a recommended plan of action.

Problem Identification

Economic Situations

President Bush signed legislation in May 2006 increasing the U.S. minimum wage rate over a three-year period beginning in July 2007 from $5.15 to $7.25. In response to this, close to 20 states passed anticipatory wage increases at higher rates that those proposed by congress in late 2006. In other words, CPK was going to face higher labor rates soon. At the same time, commodity prices were also increasing. For example, the price of cheese increased from $1.37 to nearly $2.00 from April 2007 to early July. High gas prices were also an issue faced by many Americans. In an AAA Mid-Atlantic survey, travelers were asked how they would combat the high gas prices, and 52% answered that food expenses would be cut. On the contrary, a Deutsche Bank analyst commented that because people are keeping their jobs and having their income increased, they are likely to continue dining out. Americans were also facing deteriorating housing wealth. Another challenge facing the restaurant industry was an increased interest in the restaurant industry by activist shareholders. Activist investor William Ackman was able to cause dramatic changes in McDonald’s corporate decision making by getting the media involved. The results were increased dividends, and increased divestments, resulting in increased value for stockholders.

CPK’s Share Price

CPK’s share price dropped 10% during the month of June 2006 to $22.10. CPK had recently issued a 50% stock dividend, which had increased the number of shares on a 3-for-2 shares basis, maintaining the overall capitalization of equity. Exhibit 1 shows the share price of CPK over the past year.

Exhibit 1 | CPKI Daily Closing Stock Price

Source: http://markets.emoneydaily.com/emoneydaily/quote/historical?Month=6&Symbol=537%3A1111911&Year=2007&Range=12

Because of the decline in stock price, CPK was contemplating buying back some shares. By buying back some shares, the total number of outstanding shares would be decreased, and the value per share would increase. The issue with this option was that CPK did not own very