Slice and dice. That's what the pizza pie masters at California Pizza Kitchen (NASDAQ:CPKI) do to the ingredients that go onto their tasty creations. It's also what investors should do whenever companies report earnings. Keep track of the numbers as closely as managers keep track of costs (if not moreso), and the results should be worth it. With that in mind, let's slice and dice the CPK earnings report from yesterday.

On the surface, this pie didn't look too bad. Same-store sales grew 4.8% in the last quarter, atop 8.6% growth last year. That helped push revenue up 14% compared to last year. Earnings per share, at $0.30, came in at the top end of revised guidance.

Slicing a bit further in, earnings were actually down on a GAAP basis compared to last year's quarter. Why? Look at each of the expense-line items. Keep in mind the 14% revenue growth, because we'll compare the expense growth to that. Faster expense growth cuts into margins and net income, while slower growth helps the bottom line. Dicing these expenses gives us the following:


Q2 '06

Q2 '05


Food, beverage, & paper supplies












General & administrative




*All amounts in thousands of dollars

The culprit here was General & Administrative (G&A) expense. This includes expenses not directly related to selling food, such as management and office salaries. According to comments made on the conference call, the increase was due to three things: $1.2 million in stock-based compensation, testing menu items for the ASAP store concept, and increased donations to charity because of increased royalties received from CPK's relationship with Kraft Foods (NYSE:KFT). (Along with its DiGiorno and Tombstone brands, Kraft sells CPK frozen pizzas at retail outlets, for which CPK receives a royalty. From the beginning of the relationship, CPK has donated 10% of royalties received, which shows up in G&A.)

One of those reasons doesn't make sense to me, unless I misunderstood what was said on the conference call. If donations increased because of greater Kraft royalties, they should have been more than covered by increased royalty revenue in the top line. In other words, larger donations should not have contributed to the excess growth in G&A.

Take out the stock-based compensation from this quarter for a more direct comparison, and G&A still grew by 26.6%. While one quarter does not make a trend, five quarters probably qualify. G&A expense, not including stock-based compensation, has grown faster than revenue since last year's first quarter. Note, however, that while operating and net margins decreased in the third and fourth quarters of last year, they have increased in both quarters of this year.

Investors in California Pizza Kitchen should keep an eye on G&A growth compared to revenue. If it or other expenses continually grow faster than revenues, both shareholders and the bottom line will ultimately suffer.

Circular food Foolishness:

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Fool contributor Jim Mueller does not own shares in any company mentioned. The Fool is investors writing for investors.