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California Pizza Kitchen Inc , 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 - Analyst Report), 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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