CPKI: It Got Too Hot in the Kitchen

California Pizza Kitchen (CPKI) got burned on Monday after revising earnings and sales guidance for the current quarter.  Wall Street expected $.26 per share in profits for the quarter which ends July 4th, but instead CPK management said it will likely come in around half of that level at 10 to 15 cents per share.  They admitted that comparable store sales have been much weaker than expected as well.  They had previously believed the current quarter would show declines of .5% to 2.5%, but now they are looking to drop by 6% to 7%.  Thus far in the quarter, same store sales have fallen 2.7% in April and a whopping 7.9% in May.  Slashing the company’s guidance has obviously not been kind to the stock as it has fallen about 10% even as the broad market indices are pointed higher.

It appears the casual dining restaurant was affected by renewed concerns of a double-dip among consumers as the European debt situation worsened and the stock market corrected in May.  In addition to emerging economic headwinds, CPKI stated that there were not pleased with the execution of a promotional card program.  They plan to refresh the card program later in the year, but it is certainly too late to save this quarter from being a disappointment.  CPK management plans to update the market in mid-July with a pre-earnings announcement, and then they will officially report the results on August 5th.

At Ockham, we had downgraded California Pizza Kitchen to Overvalued from Fairly Valued after it made a new 52-week high over $21 per share in April.  According to our valuation methodology, we believed the stock had become simply too hot and the underlying fundamentals could not support such an inflated price level.  At that point the stock had returned more than 50% per share year to date, which made it one of the standouts in the entire Nasdaq Composite Index.  The timing of that call has worked out thus far as the stock has since come down to a more justifiable level, although we still would not advocate buying it here, especially after such a slashing of earnings and sales guidance.  For now, we are content to reaffirm our Overvalued rating on CPKI until it can show that fundamentals are improving or the stock declines just a little further.  As an interesting note, the investor sentiment survey at the Motley Fool has its most bearish 1 Star rating on CPKI and has been that way for quite some time.

We fear that downward revisions to guidance may become a more frequent occurrence as companies struggle to match the heightened expectations that they themselves and Wall Street have placed on them.  We noticed an increasing trend of such warnings in recent weeks, although it is too early to say whether it will be widespread.  It is certainly something that we will be looking out for.

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