California Pizza Kitchen
Inc (CPKI), a leading casual dining restaurant chain,
reported first quarter 2011 results on May 5, 2011. Earnings per
share (EPS) in the reported quarter surpassed the Zacks Consensus
Estimate.
The recent earnings announcement,
subsequent analyst estimate revisions and the Zacks ratings for
both the short-term and the long-term are covered in depth
below.
Earnings
Review
California Pizza Kitchen posted
first quarter 2011 earnings of 9 cents per share, which were above
the Zacks Consensus Estimate of 6 cents and the company’s guided
range of 3 cents to 5 cents per share. However, reported earnings
missed the prior-year quarter earnings by a penny.
The better-than-expected results
were driven by the menu optimization program, which focuses on
higher margin menu items and cost control.
The pizza restaurant chain reported
that total revenue for the quarter plunged 0.5% year over year to
$156.0 million and was also below the Zacks Consensus Estimate of
$158.0 million.
Comparable store sales fell 2.1% in
the reported quarter, as inclement weather conditions adversely
impacted same-restaurant sales growth and restaurant operating
margin contracted 80 basis points (bps) to 16.1% due to input cost
pressure.
Read our full coverage on this
earnings report: CALIFORNIA PIZZA BEATS ESTIMATES
Earnings Estimate
Revisions: Overview
Following the first quarter
earnings release, the Zacks Consensus Estimate for the company has
been on the rise, with most of the analysts remaining bullish on
the stock. The upside in first quarter results and expectation of
better traffic trends and improvement in restaurant margin have
bolstered their confidence. The earnings estimate details are
discussed below.
Agreement of
Analysts
Analysts mostly remain optimistic
on California Pizza Kitchen. Revision trends in the last 30 days
drifted toward the positive side. For fiscal 2011, 7 out of
the 11 analysts covering the stock raised their estimates while for
fiscal 2012, 6 out of the 10 analysts increased their
estimates. Only two analysts slashed their estimates for both 2011
and 2012. The revision trend remains identical for the last 7 days
also.
Positive revisions by the analysts
are based on continous efforts made the company to plug its falling
comps by implementing several sales-building programs.
Additionally, to drive traffic, California Pizza Kitchen intends to
roll out new menu offerings in June with a new look and nine new
items.
The highlight of the menu will be
natural chicken and turkey, gluten-free pizza crust, etc. Moreover,
to drive traffic, aggressive marketing is planned particularly for
the third quarter of 2011 to support the new menu launch as well as
mitigate the drag of the thank-you card program last year, which
has historically been a significant comp driver.
The company witnessed a drop of
3.1% in comps for the month of April, mostly due to the unfavorable
impact of the Easter shift. However, California Pizza Kitchen
expects comps to be up 3% for the remaining two months of the
second quarter of 2011 aided by earlier promotion of the thank-you
card program. Management projects comparable store sales between 0%
and positive 1.0% for second quarter 2011.
The company also continues to
expand its restaurant margin by using its integrated information
system, including point-of-sale system, an inventory usage analysis
system, labor-scheduling system and theoretical food cost system.
To further enhance margin and reduce cost, the company also rolled
out a menu optimization program, which targets to eliminate 14
lower-selling and labor-intensive items from the menu, and create a
more efficient and cost-effective back-of-the-house operation.
Through this program, the company
expects to save approximately $6 million annually. Management also
plans to utilize 0.7% of pricing in the new menu to mitigate the
commodity cost inflation. To further enhance profit, California
Pizza Kitchen is currently pruning its several underperforming
units from its existing base of restaurants. Additionally,
California Pizza Kitchen’s transition to Nestle is complete with
royalties from the licensing agreement increasing 0.8% in the first
quarter.
The company also remains focused on
accelerating its growth in 2011 and 2012, through franchising in
the international market. The company’s international franchisees
expect to open a minimum of 10 restaurants in 2011.
However, for the second quarter of
2011, the analysts remain slightly negative with 5 out of the 11
analysts reducing their estimates while 4 moved in the opposite
direction.
The analysts remain cautious due to
cost inflation, which will lower the magnitude of the margin
rebound. The company expects commodities cost inflation in the
range of 3% to 3.5% for 2011, up from the previous expectation of
2.5%.
Magnitude of Estimate
Revisions
Following the release of the first
quarter results, estimates for both fiscal 2011 and 2012 have
jumped by 2 cents to 73 cents and 86 cents, respectively, over the
last 30 days. However, for the second quarter, estimates remain
unchanged at 21 cents in the last 30 days.
Our
Recommendation
California Pizza Kitchen has
implemented several sales-building programs to revive its top-line
growth and falling comparable store sales. The company also intends
to focus on operational efficiencies in order to drive restaurant
margins. The financial condition of the company is also sound with
a debt free balance sheet.
We remain cautious on the stock as
comparable store sales and traffic have slumped, given that
budget-constrained consumers are trading down to lower-priced
dining options. Moreover, the company is experiencing stiff
competition from other casual dining restaurants and cost
escalation is expected to keep margins under pressure in the
upcoming quarters.
Accordingly, we keep our
conservative view on California Pizza Kitchen shares and have a
Zacks #3 Rank (short-term Hold recommendation). Our long-term
recommendation for the stock remains at Neutral.
Apart from California Pizza
Kitchen, another stock that promises long-term growth opportunities
is BJ’s Restaurants, Inc. (BJRI), which has a
Zacks #1 Rank (short-term Buy recommendation), as the company
reported first quarter 2011 adjusted earnings of 25 cents per
share, exceeding the Zacks Consensus Estimate of 19 cents driven by
strong comparable restaurant sales growth.
About Earnings Estimate
Scorecard
Len Zacks, PhD in mathematics
from MIT, proved over 30 years ago that earnings estimate revisions
are the most powerful force impacting stock prices. He turned this
ground breaking discovery into two of the most celebrating stock
rating systems in use today. The Zacks Rank for stock trading in a
1 to 3 month time horizon and the Zacks Recommendation for
long-term investing (6+ months). These “Earnings Estimate
Scorecard” articles help analyze the important aspects of estimate
revisions for each stock after their quarterly earnings
announcements. Learn more about earnings estimates and our proven
stock ratings at http://www.zacks.com/education/.
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CALIF PIZZA KIT (CPKI): Free Stock Analysis Report
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