Few companies have reported lower earnings this year, only to be rewarded with a surge in their stock price. Put California Pizza Kitchen
First, the numbers ...
The company reported first-quarter revenue growth of 15.2%, with solid comparable-store sales growth of 4.7%. Cost of sales was approximately flat at 82%, with food and beverage cost improvements offset by higher labor expenses. The 23% jump in general and administrative expenses, partially from an accelerated stock vesting expense, was the primary culprit in lowering operating income by 18%.
Earnings per share were $0.18, compared to $0.23 last year, with $0.02 of the gap related to the stock vesting. The day after the earnings release, the stock surged forward by more than 7%. Go figure.
Comp sales growth
To be fair, EPS for the quarter was in line with analyst expectations, and it's hard to argue with solid restaurant comps, particularly on top of 6.4% in the prior-year quarter. CPKI continues to post solid sales gains in an environment where top casual dining chains like Brinker International
The brand thing
CPKI has shown persistent strength over the past year, despite some earnings speed bumps. Last fall, analysts hurled tomatoes at the company when it lowered fourth-quarter guidance. But the food fight didn't last long, and by January, the stock was setting new highs. For the past 12 months, the shares are up more than 20%, handily beating the S&P 500. You have to think it's a brand thing.
Here's a company with an exceptionally high-quality product and numerous levers to grow sales and earnings. Company-owned restaurant locations in the U.S. are sprouting at just north of 10% per year, with plenty of room for further expansion. California Pizza Kitchen is opening franchise locations throughout the Far East, with a new franchise partner in Mexico announced earlier this year. Royalties from the license agreement with Kraft Foods grew 33% in the most recent quarter.
Given this, I can understand the G&A expense growth -- the company is investing to manage its various growth channels most effectively. What other $500 million restaurant chains can you name with this many brand development opportunities?
Highfliers aren't cheap
It's easy to get caught up in the excitement. The CAPS community loves the stock, which I consider a reliable barometer. But don't forget that high-multiple companies like Starbucks
I'm looking for an opportunity to buy into CPKI. But with a trailing-12-month P/E multiple higher than 30, and the company not yet proving it can capitalize on the potential, I'm not ready to bite off a big slice of this pie.
Want a second (or third) opinion on CPKI? Check out:
- Foolish Forecast: Peeking Into California Pizza's Kitchen
- Slicing and Dicing in California
- California Dreamy
Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles. He owns shares of Starbucks, but none of the other companies mentioned in this article. The Fool's disclosure policy is a fan of California Pizza Kitchen's margherita pizza.