Highlights include California Pizza Kitchen, Inc. (CPKI), BJ's Restaurant and Brewery, Inc. (BJRI), Red Robin Gourmet Burgers, Inc. (RRGB) and The Cheesecake Factory, Inc. (CAKE).

CPKI Cooks Up Positive Earnings Surprise, but Stock is No Treat

Traffic tumbles and revival may be a year away.

California Pizza Kitchen, Inc. (CPKI) is set to soundly beat its guidance when it reports earnings on May 7th.? The out-performance is apparently the result of strong cost controls, declining cheese prices, and conservative assumptions.

After the market closed yesterday, the casual dining chain announced that it expects EPS to be $0.09 to $0.10, more than double the guidance of $0.03 to $0.05 it provided with its mid-February 4Q08 earnings release. Based on the out-performance, we are raising our 2009 EPS estimate by $0.06 to $0.67.

But not surprisingly, sales remain weak. Management indicated that 1Q09 same-store sales slid 5.9%, in the mid-range of its earlier guidance of a decline 5.5% to 6.5%. This implies customer traffic continued to fall sharply - we estimate a drop of roughly 9%, given that menu prices were up about 3% from a year earlier going into 2009. The drop laps a fall in traffic of 5.1% in 1Q08.

Although we expect traffic declines will stabilize as increasingly negative comps are lapped this year, renewed growth is unlikely as unemployment rises, which is forecast to continue into 2010.

Consequently, the risk-reward in the stock is not favorable despite the earnings out-performance. California Pizza Kitchen shares have soared 182% from their November lows, in line with the casual dining industry, on expectations of a 2010 recovery. Its valuation multiples have expanded and the shares now trade at 22x our new 2009 EPS estimate and 21x our 2010 estimate - well above our estimate of the company's 5-year earnings growth rate of 16%, at a time of murky visibility.

Should expectations for an early 2010 economic recovery be dimmed, we would expect downward price movement in the casual dining group's shares, with particular weakness in the shares of companies with sharply falling traffic, such as California Pizza Kitchen, BJ's Restaurant and Brewery (BJRI), Red Robin Gourmet Burgers (RRGB) and the Cheesecake Factory (CAKE).