California Pizza Kitchen

California Pizza Kitchen

California Pizza Kitchen is an upscale pizza parlor based out of California. It was founded in 1985 by defense attorneys Larry Flax and Rick Rosenfield in Beverly Hills, California. It derives its revenues from three different sources: sales at company owned restaurants, royalties from franchised restaurants, and royalties from its partnership with Kraft Foods in which they sell frozen pizzas in grocery stores under the California Pizza kitchen name. CPK also has developed a quick "grab and go" restaurant called ASAP which are located mainly in airports and malls. However, they have halted expansion of this in order to focus on international development of its main restaurant.

With the recent 10% share price decline, CPK management considers if it would be an ideal time to repurchase shares and potentially leverage the company's balance sheet with its existing line of credit. In order to continue to fund strong expansion, it is considering repurchasing shares and will need to use debt financing to pursue this. Since going public the company has avoided using debt to finance growth operations. This case examines the question of financial leverage at California Pizza Kitchen in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program.