Financial Analysis of California Pizza Kitchen - Case Study Example

Finance Assignment Name Institution Date Finance Assignment Introduction This assignment is aimed at analysing a case study of the California Pizza Kitchen which is a restaurant based in California with different branches in different countries. The assignments presents a brief summary of the case, identifies the objectives and learning outcomes of the case, describe a critical analysis of the case based on related topic from the textbook, providing the facts as well as the findings of the case after the decision period and providing a conclusion of the learning outcomes, analysis and future guidance on such topic. A Brief Summary of the Case The case presented is about a restaurant with the name California Pizza Kitchen. The company is faced with various finance issues. However, it has been able to survive and remain in business for many years. From this case, it is clear that, what makes a company remain in operation is its capacity to invest enough capital and the staying power. Additionally, despite the growth in sales of a company and its strong performance in the industry, a decline in the share price of the company has a negative effect on its financial performance. From this case, it is clear that, there are different ways of financing a business and it presents two ways of sourcing capital for a business such as equity and debt financing. These two methods of financing a business have strengths and weaknesses. Therefore, before making a decision for using them, it is important for an organisation to determine these strengths and weaknesses so as to make a conclusive decision for financing the business. The case provides evidence to the reason as to why having enough capital is usually the key ingredient for success of a company (Smith 2007, p.1). In this case, the California Pizza Kitchen has different sources of revenue such as sales as well as royalties. From the case study, it is evident that the organization has different sources of revenue of California Pizza Kitchen including; sales and royalties. There are also different strategies that a business can use to grow including; brand extension, franchising, partnership, differentiation, offering low priced products and advertising. As demonstrated in the case, a business is required to highlight issues that are important that must be maintained in the organization. There are various important issues that a business should ensure so as to survive in the international business environment like learning the culture of other nations and what people like in the new market environment. There are also other marketing strategies that can be used by an organization to influence its grown. For example, the California Pizza Kitchen uses different marketing strategies. The company uses strategies such as; outdoor media, online marketing, direct mail offerings as well as public relations. From the case, the restaurant industry in California with its trends is expounded. The restaurant industry is seen to expand at a rate of 6.5%. However, it is faced by various challenging forces including; increasing commodity prices, higher labour costs, softening demand which is as a result of high gas prices, deteriorating housing wealth and intense interest within the industry that results from activist shareholders. From this case, it is evident that, there are recent developments of the California Pizza Kitchen including; the company’s results, comparable sales trends for the company with its peers, analysts forecast for the company, increase in revenues, the company environment, capital expenditures and commodity price pressures. The case also presents the company’s capital decision structure including its book equity, market capitalisation, and stock dividend, return on equity, equity financing and debt financing. It also presents various financial statements of the company. Objectives and Learning Outcomes of the Case Objectives - The case study aims at demonstrating what keeps a company in operation despite many challenges - To describe challenges that affects the financial performance of an organisation - To examine that, the financial performance of a company is not only determined by the increase in sales but also other factors such as increase or decline of the company’s share price. - To evaluate the various methods of financing a business - To examine the advantage of using equity financing over debt financing - To establish the different sources of revenue of a business - To evaluate different strategies that a business can use to grow - To examine the different marketing strategies that can be used by an organisation to remain competitive in the market Learning Outcomes After analysing the case study, one will be able to; - Understand what makes a company remain in operation despite many challenges that it may face - Describe the various challenges that affect the financial performance of an organisation - Demonstrate the determining factors of the financial performance of a company - Describe the various ways of financing a business - Understand the need for choosing one method of financing over the other - Describe the various sources of revenue for a business - Describe some of the different strategies that a company can use to achieve growth - Evaluate different marketing strategies available for an organisation Critical Analysis of the Case Based on Related Topic From the Textbook This case study is related to the topic of capital structure which is a corporate finance concept that serves to explain the survival of a firm. The case recognises that, the capability of a firm to have enough capital is the driving force of its staying power within the market. The reason is that, with enough capital, a business is able to thrive during recession and depression times. The case also recognises that, capital structure influences the gains that shareholders receive from the company. It is also through capital structure that the managers of a company have the capacity to determine how much of the capital of the business should be sourced from debt without endangering the business. From the case, it is clear that, the managers of the company are very careful about sourcing the capital of the business from debt financing. They determine the strength of the business before making any decision to source its capital through debt. The case identifies that, the financial staying power of a business is evident to come from its capital structure. The capital structure is a finance concept that describes the different sources of financing of a company to enable it undertakes its overall operations and also influences its growth. Since capital structure involves a combination of different financing methods of a business, the case identifies the different ways through which the business is financed. The capital structure of a business involves a combination of common equity, preferred equity, long term debt and specific short term debt. In its capital structure, the organisation uses equity financing through retained earnings, preferred stock as well as common stock. Applicably, the California Pizza Kitchen demonstrates why its equity financing as a way of financing the business over debt financing. Capital structure helps an organisation make an analysis of the proportion of debt to equity. The debts to equity ratio serves as prove of the risky status of a company. From the case, it is true that the company's capital status is strong since it depends on debt financing at minimum. It is evident that, a company that is highly financed by debt is seen to have a high possibility of greater risky status than a company that is financed by equity. A company which is highly financed by equity is highly leveraged and has a low risky status. The capital structure decision of California Pizza Kitchen includes; Equity - $ 226 million, Market capitalization - $ 644 million, stock dividend – 50%, Return on Equity – 10.1%, and debt - $ 75 million. Question 4 Facts and findings of the case after the decision period The California Pizza kitchen (CPK) restaurant took a while before it would find its way in the market due to a number of factors that the management had to put into consideration. Among them were the prevailing financial factors that were in the hotel market at the time of its operations as well as the prices of the commodities in which the restaurant was operating in. moreover the company also lend a listening ear as well as an open eye to the actions of the government so that it would grab any open opportunity that would have been available. According to the financial report that is represented by the CPK restaurant for the period during which the firm was still in the process of establishment it is clear that the actions that the company undertook in order to improve its performance were quite beneficial. For instance in 1985 as CPK began to pick up, it was widely known for its hearth-baked barbecue-chicken pizza, a product that made the restaurant within the Beverly Hills in California to pick up well. Later the firm’s expansion across the country, state as well as the globe followed in the following several years as indicated in the financial statements. This went on until in 2007 where the CPK restaurant company had opened more than 213 locations in 28 states and 6 foreign countries. The table above shows the gradual rise in the number of shareholders for the last three years before the accumulation of about 226,000,000 total share equity. Considering the consolidated income statements for the company in the last six years before 2007 financial year it was clear that the company’s main income was generated from its three main sources. These sources included restaurant sales, royalties from franchised restaurants and the sales that were got from the partnership that existed with Kraft Foods to sell CPK-branded frozen pizzas in grocery stores. At the start of the year 2003 the company had already expanded beyond its original concept and already had two other restaurant brands, although it mainly depended on its 170 units of the company-owned full service restaurants that were in existence by then. The table above shows how the sales increased consistently since 2003 to 2007 as the company continued to employ various strategies as discussed in this paper. The strategies enhanced the company to maintain the staying power. Another sector in which the management had sought to expand its sales in was the company-owned ASAP units which were established in 2000 and were later retooled in 2003. These company-owned ASAP offered the company a popularity in the sale of its Pizzas, salads, soups, and sandwiches as well as some in-restaurant seating sales. However according to the management the ASAP units never met what was expected of them. This led to an indefinite halt of all ASAP developments by 2007. At the beginning of 2007 the company sought knowledgeable and proficient franchise partners who would be able to uphold the company’s brand as well as enhance the growth of the number of international units. This action plan enabled the company to acquire an initial payment of $50,000 to $ 65,000for each location that was opened. In addition it also facilitated an estimated growth in the gross sales of about 5%. Throughout the company’s trail of activities and ventures the management firmly believed in its success both domestically and internationally. This was enhanced by management emphasizing on such ventures as the Kraft Foods partnerships, guest satisfaction dedication as well as menu innovation and suitable culture of service. CPK encountered quite a big challenge of growing the number of restaurants over the last five years or so by 38%, however, the restaurant has consistently been able to generate an operating return that was able to sustain the company in the industry. By the end of the second quarter the company’s equity was expected to be around $226 million. Comparing the performance of CPK with its industry peers in the capital market, the restaurant has really been able to benefit its investors. For instance CPK investors received an additional share for every two shares of their common stock held by 2007. The menu that was creatively developed was another major aspect to the success of the restaurants operations and which was also given a priority in enhancing growth in company’s sales. The menu was well developed with high-quality ingredients that offered customers with distinctive and compelling flavours to commonly recognized foods. In order to ensure that the company’s menu remained original the management reviewed detailed sales reports twice a year and replaced any slow-selling offerings with new items. Moreover comparing the company’s menu with other casual dining menus it was clear that the CPK’s average check of $13.30 was far below that of many other restaurants. RBC capital market analysts labelled the company’s menu inventive as Price-Value-Experience leader in its ground. (Fine, 2008) On the other hand the advertising at the CPK restaurant was always kept below that of its competitors such as Chili, Red Lobster, and Olive Garden among others by 3-4% of their sales. This is because CPK Company maintained its advertising cost at 1% of its sales while most of its marketing expenses were used in the menu development. Question 5 Concluding remarks From the CPK restaurant company adventure it can be concluded that the success of a business, especially restaurants does not only depend on its location but it is also determined by other factors such as management of the commodities being offered and other services rendered to the consumers and more so the ‘staying power’. The staying power of a business in this case refers to the ability of the restaurant to cope with prevailing conditions within the business environs. The main factor to consider for the staying power of the company is its performance in the stock market. CPK performance in the capital market as discussed above it has been a priority for the company since it has enabled it to obtain a good market share in the sector. This case study is related to the topic of capital structure which is a corporate finance concept that serves to influences that explains the survival of a firm. The case recognizes that, the capability of a firm to have enough capital is the driving force of its staying power within the market. The reason is that, with enough capital, a business is able to thrive during recession and depression times. CPK restaurant has been able to succeed in the sector due to its ability to maintain its staying power in the business. The company has been able to uphold this through the employment of several strategies as discussed in this paper. For instance the company invested in developing its menu such that it was able to win the highest number of customers as compared to any other casual dining whenever it was operating in. Another factor that enhanced the CPK staying power was the keen observation to its demographics. The management often reported that its core customer had an average household income of not less than $75,000. This customer base relatively sheltered the company from various macroeconomic conditions and pressures that would lower sales among competitors who had fewer well-off patrons. Moreover the company had devoted patrons who created free but a very valuable word-of-mouth marketing for the company’s offerings. Future guidance Given the company’s operation model, it is clear that, the restaurant was able to overcome some of the major forces that normally pose a challenge to the industry. For example the rising commodity prices that go hand in hand with the gas and other fuel prices were offset by the restaurant raising its menu prices in varying degrees. In order to prevent consumer traffic the restaurant should ensure that the prices move along with the macroeconomic conditions such as increased labour cost, inflation as well as decrease in consumer’s income. Other major strategies that a business can employ so as to grow includes; brand extension, franchising, partnership, differentiation, offering low priced products and advertising. This has been demonstrated by the CPK in the case study and how well it employed such strategies in order to enhance the growth of its sales. Appendices CPK California Pizza Kitchen COGS Cost of Goods sold ASAP As Soon As Possible ERUEs Equity Research Updates Earnings Major comparable CPK stores The case provides evidence to the reason as to why having enough capital is usually the key ingredient for success of a company. In this case, the California Pizza Kitchen has different sources of revenue such as sales as well as royalties. From the case study, it is evident that the organization has different sources of revenue of California Pizza Kitchen including; sales and royalties. There are also different strategies that a business can use to grow including; brand extension, franchising, partnership, differentiation, offering low priced products and advertising. References Smith, R, 2007, Rolling in Dough: For the Creators of California Pizza Kitchen, Having Enough Capital was the Key Ingredient to Success, Newsweek. Read More