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California Pizza Cooks Up Poor Excuses

CaliforniaPizza Kitchen (Nasdaq: CPKI  ) served up a preview of its fourth-quarter results yesterday, and investors found them less than palatable. The restaurant outfit's earnings warning should not cause anyone to panic, although the company's explanation for its sub-par showing may leave investors with a bad taste in their mouths.

The pizza specialist indicated that same-store sales for the fourth quarter were up 5.3%, a deceleration from the 7.7% growth in the comparable period of 2004, and below the firm's projection of between a 5.5% and 6.5% increase. What's more, the company is now expecting that fourth-quarter earnings per share will come in at $0.29, also below its recent forecast calling for EPS of between $0.30 and $0.31.

California Pizza's "miss" is pretty small, and so, from the standpoint of the health of the business, the numbers themselves do not appear to be alarming. However, two facts do make the earnings warning somewhat disconcerting. First, the fourth-quarter forecasts that California Pizza missed were provided by the company less than three months ago. This fact suggests that either management did not have a good handle on trends in the business or that unexpected developments late in the quarter were responsible for the loss.

In fact, California Pizza made clear why its results weren't up to snuff, and this brings us to the other important issue in the warning -- the firm's explanation for its soft performance. Specifically, the company blamed remodeling initiatives and hurricane-related store-closure days. Again, it seems like management should have been aware of these issues on Oct. 27 when it issued its forecast. Remodeling had been planned well in advance, so this is an odd excuse.

As for the hurricane part, admittedly, Wilma passed through Florida just three days before the forecast, but it still seems like there should have been enough time to make a worst-case estimate of the impact. Furthermore, just a small portion of the company's restaurants could have been impacted by Wilma. According to California Pizza's website, it has just sites 11 sites in Florida out of a total of 188 restaurants.

The latest earnings warning is no reason to abandon California Pizza's stock. But management's explanations for the miss should prompt investors to keep a close eye on trends in the business.

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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.

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