North America Equity Research

07 October 2009

Neutral
California Pizza Kitchen CPKI, CPKI US
Price: $14.02
Sales Slightly Below Our Lowered Expectations; EPS
Price Target: $15.00
Slightly Better on Costs/Tax Rate, Though Not Likely
to Drive Stock Upside N-T

CPKI reported 3Q comps of down 8%, below our downwardly revised negative 7.5% Small-Mid Cap Restaurants
expectations and below the low end of the company’s down 6.5-7.5% guidance. As AC
Steven Rees
July was down 9% (vs. down 1.3%), implied blended Aug/Sept comps of down 7.4%
(1-212) 622-6575
(vs. a blended down ~3% comparison) reveal underlying trends on a 2-year-stacked steven.rees@jpmorgan.com
basis that didn’t improve throughout the quarter. CPKI launched many sales building
John Ivankoe
initiatives during 3Q (new discount card program, new loyalty program with American
(1-212) 622-6487
Express, a new B-to-B program to drive ToGo and an upgraded wine list), and thus, john.ivankoe@jpmorgan.com
continued weakness in August/September highlights a still very fragile casual dining
Renato Basanta, CFA
environment, especially in CA, where 42% of units are located. (1-212) 622-5331
renato.x.basanta@jpmchase.com
• 3QE earnings upside a function of operating cost management, lower tax rate J.P. Morgan Securities Inc.
(helping by a penny), and historically conservative margin guidance, but we
think comp stabilization is necessary to drive the stock higher near term. 3Q Price Performance
EPS (to be reported Nov. 5 post close) are now expected to be $0.22 to $0.24, up
16
from prior $0.19-$0.21 guidance and our on-consensus $0.21 expectations.
Despite lower comps, we are raising our $0.21 estimate to $0.23, based on a lower $
12

tax rate and better operating cost management. We are maintaining our 4Q comp 8
of down 3% (vs. a very easy down 7.2%), which implies a 2-year-stacked run rate
4
similar to 3Q’s. Our F10 continues to be based on + 1.3% (flat in 1H, 2-3% in
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
2H), though risk clearly remains.
YTD 1m 3m 12m
• At current valuation, we prefer Neutral-rated PFCB vs. CPKI in small cap Abs 34.3% 1.9% 8.7% 28.0%
casual dining given similar geographic, consumer, and check average
exposure. PFCB trades at 15x F10E EPS and 5.4x ebitda while CPKI trades at
16.2x F10 EPS and 5.2x ebitda. While it is difficult to argue against CPKI’s high
returning Kraft licensing business (~25% of operating income), we believe this is
reflected in the stock’s higher P/E multiple and believe this should also be a driver
of PFCB’s valuation over time. Both stocks have strong balance sheets with
minimal/no net debt, though PFCB offers a much higher FCF-to-equity yield of
13% on F10 estimates given a slowdown in growth, while CPKI’s slight uptick in
unit development only leaves a 3.8% FCF-to-equity yield. Our December 2010 PT
for CPKI is $15 and for PFCB it is $38; the CPKI PT reflects a 17x multiple on
our F10 estimates, the high end of the typical 15-17x range. DRI remains our top
pick in the space with a $40 price target as a low 13.2x multiple is matched with
low-set expectations.

California Pizza Kitchen, Inc. (CPKI;CPKI US)

2008A 2009E 2009E 2010E 2010E Company Data
(Old) (New) (Old) (New) Price ($) 14.02
EPS Reported ($) Date Of Price 07 Oct 09
Q1 (Mar) 0.09 0.11A 0.11A 52-week Range ($) 17.44 - 5.24
Q2 (Jun) 0.26 0.25A 0.25A Mkt Cap ($ mn) 338.61
Q3 (Sep) 0.20 0.21A 0.23A Fiscal Year End Dec
Q4 (Dec) 0.13 0.19A 0.19A Shares O/S (mn) 24
FY 0.68 0.76A 0.78A 0.86 0.87 Price Target ($) 15.00
P/E FY 20.6 18.4A 17.9A 16.4 16.2 Price Target End Date 31 Dec 10
Source: Company data, Bloomberg, J.P. Morgan estimates.

See page 5 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Steven Rees North America Equity Research
(1-212) 622-6575 07 October 2009
steven.rees@jpmorgan.com

Table 1: CPKI Historical SSS

Q1 Q2 Q3 Q4
2004 price 1.6% 4.5% 4.1% 3.8%
traffic 3.8% 2.1% 3.3% 2.2%
mix 1.8% 0.7% 1.3% 1.7%
comp 7.2% 7.3% 8.7% 7.7%

2005 price 5.3% 2.7% 3.6% 4.3%

traffic 3.1% 3.4% 2.2% 0.8%
mix 0.9% 2.5% 1.3% 0.2%
comp 9.3% 8.6% 7.1% 5.3%

2006 price 3.6% 3.7% 3.9% 3.4%

traffic 2.3% 1.3% 3.0% 3.5%
mix 0.5% -0.2% -1.3% 0.0%
comp 6.4% 4.8% 5.6% 6.9%

2007 price 3.2% 3.7% 4.7% 4.7%

traffic 1.2% 1.3% (1.5%) (2.9%)
mix 0.3% 0.0% 0.3%
comp 4.7% 5.0% 3.5% 1.8%

2008 price 5.4% 4.9% 3.6% 3.4%

traffic (5.1%) 0.0% (5.7%) (10.4%)
mix 0.1% (3.5%)* 0.3% (0.2)%
comp 0.4% 1.4% (2.4%) (7.2%)

2009E price 3.1% 3.0% 2.0% 1.3%

Traffic (9.0%) (8.5%) (9.0%) (3.3%)
mix 0.0% (1.0%) (1.0%) (1.0%)
comp (5.9%)A (6.5%)A (8.0%)A (3.0%)
Source: Company reports and J.P. Morgan estimates. *In 2Q08, mix reflects negative 3.3% as a result of the discounts from the
Thank You promotion and negative 0.2% from traditional menu mix.

Table 2: CPKI F09 and F10 Free Cash Flow Expectations

F09E F10E
Net Income 18,896 21,439
D&A 38,508 39,672
Capex 27,000 48,000
Free Cash Flow 30,404 13,111

Equity value using end of F08

share count 335,400 342,753
FCF yield 9.1% 3.8%
Source: J.P. Morgan estimates, company data.

Table 3: Casual Dining Stocks Valuation

Price JPM Rating C10 P/E EV/C10 EBITDA Next FY FCF Yield Net Debt/C10 EBITDA
CAKE 17.79 UW 15.6 6.7 10% 0.6
CPKI 14.02 N 16.2 5.2 4% 0.5
DIN 24.69 N 11.8 8.0 6% 6.6
DRI 32.89 OW 13.2 7.1 5% 2.0
EAT 14.75 OW 12.1 6.0 13% 1.8
PFCB 33.71 N 15.0 5.4 13% 0.1
RRGB 19.54 N 11.5 5.1 15% 2.1
TXRH 10.22 OW 14.7 6.9 6% 0.8
Source: J.P. Morgan estimates, company data.

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Steven Rees North America Equity Research
(1-212) 622-6575 07 October 2009
steven.rees@jpmorgan.com

Valuation and Rating Analysis

Remain Neutral. CPKI is a well-managed and well-positioned brand to benefit from
an eventual cyclical recovery, given its high brand awareness, an underpenetrated
store base, and high-margin Kraft licensing business, which contributes roughly 25%
of operating income. However, we remain Neutral on relative valuation and the
decelerating industry comp environment. We maintain our Dec-10 price of $15,
which assumes a 17x target multiple on our F10 estimate. We are using a multiple at
the high end of the 15-17x casual dining longer-term average, given CPKI’s
attractive higher-margin Kraft business.

Risks to Our Rating and Price Target

The primary downward risks to our price target and Neutral rating are an inability to
reverse negative comp sales trends, high exposure to the potentially worsening
California market (42% of comp base units), and margin deleverage risk from
higher-than-expected commodity costs—specifically, cheese, as it accounts for
approximately 10% of COGS. In addition, increasing rate of company development
in F10 adds risk since new stores can pressure margins. Given CPKI’s predominantly
company-owned nature, the company is exposed to fluctuations in same store sales
and margins, and we estimate that a 1% change in systemwide same store sales
would impact CPKI’s annual EPS by $0.11, and a 100-bp drop in operating margins
would impact annual EPS by $0.19. Upside risks include a sales acceleration
throughout F09 and F10 and/or greater-than-expected margin improvement from
strong licensing revenues.

3
Steven Rees North America Equity Research
(1-212) 622-6575 07 October 2009
steven.rees@jpmorgan.com

California Pizza Kitchen: Summary of Financials

Income Statement - Annual FY08A FY09E FY10E FY11E Income Statement - Quarterly 1Q09A 2Q09A 3Q09E 4Q09E

Company sales 666 656 685 - Company sales - - - -

Franchise and other revenue 11 13 14 - Franchise and other revenue - - - -
Revenues 677 668 699 - Revenues - - - -

Restaurant operating income 112 109 116 - Restaurant operating income - - - -

SG&A 52 53 55 - SG&A - - - -
Operating income 26 28 33 - Operating income - - - -

EBITDA 66 66 72 - EBITDA - - - -

Net interest income / (expense) (1) (1) (1) - Net interest income / (expense) - - - -
Other income / (expense) 0 0 0 - Other income / (expense) - - - -
Pretax income 25 27 32 - Pretax income - - - -

Income taxes 7 8 10 - Income taxes - - - -

Net income - GAAP 17 19 21 - Net income - GAAP - - - -

Diluted shares outstanding 25 24 25 - Diluted shares outstanding - - - -

EPS - GAAP 0.68 0.78 0.87 - EPS - GAAP 0.11 0.25 0.23 0.19
EPS - recurring 0.68 0.78 0.87 - EPS - recurring - - - -

Balance Sheet and Cash Flow Data FY08A FY09E FY10E FY11E Ratio Analysis FY08A FY09E FY10E FY11E

Cash and cash equivalents 58 - - - Revenue growth 7.0% (1.3%) - -

Other current assets 34 - - - EBITDA growth (5.7%) 0.4% - -
Current assets 92 - - - EPS growth (10.5%) 15.0% - -
PP&E 362 - - -
Total assets 474 - - - Restaurant operating income margin 16.9% 16.6% - -
EBIT margin 3.8% 4.2% - -
Total debt 74 - - - EBITDA margin 9.8% 9.9% - -
Total liabilities 202 - - - Tax rate 30.4% 29.1% - -
Shareholders' equity 272 - - - Net margin 2.5% 2.8% - -

Net Income (including charges) 17 - - - Net debt / EBITDA 0.2 - - -

D&A 40 39 40 -
Change in working capital 0 - - - Return on assets (ROA) 4.1% - - -
Other - - - - Return on equity (ROE) 7.0% - - -
Cash flow from operations 62 - - -

Capex (64) - - -
Free cash flow (2) - - -

Cash flow from investing activities (64) - - -

Cash flow from financing activities 49 - - -
Dividends 0.00 0.00 0.00 -

Source: Company reports and J.P. Morgan estimates.

Note: $ in millions (except per-share data). Fiscal year ends Dec

4
Steven Rees North America Equity Research
(1-212) 622-6575 07 October 2009
steven.rees@jpmorgan.com

Other Companies Recommended in This Report (all prices in this report as of market close on 07 October 2009)
Darden Restaurants (DRI/$32.89/Overweight), P.F. Chang's China Bistro (PFCB/$33.71/Neutral)
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures

• Market Maker: JPMSI makes a market in the stock of California Pizza Kitchen, P.F. Chang's China Bistro.
• Client of the Firm: California Pizza Kitchen is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company non-investment banking securities-related services and non-securities-related services. Darden Restaurants
is or was in the past 12 months a client of JPMSI. P.F. Chang's China Bistro is or was in the past 12 months a client of JPMSI; during
the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services
and non-securities-related services.
• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking
services from P.F. Chang's China Bistro.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from California Pizza Kitchen, P.F. Chang's China Bistro.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from California Pizza Kitchen, P.F. Chang's China Bistro. An affiliate of JPMSI has received compensation
in the past 12 months for products or services other than investment banking from California Pizza Kitchen, P.F. Chang's China
Bistro.

California Pizza Kitchen (CPKI) Price Chart

Date Rating Share Price Price Target

N $12 ($) ($)
40
30-Nov-07 N 15.94 -
N $9 15-Jan-09 N 8.05 7.00
13-Feb-09 N 10.98 9.00
30
N N $7 N $15 09-Apr-09 N 14.80 12.00
Price($) 07-Aug-09 N 15.90 15.00
20

10

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
06 07 07 07 07 08 08 08 08 09 09 09 09

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Nov 30, 2007. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

5
Steven Rees North America Equity Research
(1-212) 622-6575 07 October 2009
steven.rees@jpmorgan.com

Darden Restaurants (DRI) Price Chart

Date Rating Share Price Price Target

OW $31 ($) ($)
75
20-Nov-06 N 40.78 --
OW OW $41 OW $40 16-Jan-07 OW 39.43 --
60
29-May-08 OW 34.01 44.00
N OW $44 OW $40 OW $37 27-Aug-08 OW 28.25 41.00
45 05-Nov-08 OW 22.89 31.00
Price($)
24-Mar-09 OW 36.16 40.00
30 07-Aug-09 OW 32.10 37.00
05-Oct-09 OW 33.70 40.00
15

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
06 07 07 07 07 08 08 08 08 09 09 09 09

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

P.F. Chang's China Bistro (PFCB) Price Chart

84
Date Rating Share Price Price Target
N $31 ($) ($)
70 11-Feb-09 N 17.58 20.00
N $22 24-Mar-09 N 25.35 22.00
56 23-Apr-09 N 32.54 31.00
N $20 N $38 07-Oct-09 N 34.21 38.00
Price($) 42

28

14

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
06 07 07 07 07 08 08 08 08 09 09 09 09

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Steven Rees: California Pizza Kitchen (CPKI), Chipotle Mexican Grill, Inc. (CMG), Chipotle Mexican
Grill, Inc. - B (CMGb), Coinstar Inc. (CSTR), DineEquity Inc. (DIN), Harley-Davidson (HOG), Jack In The Box Inc.
(JACK), Panera Bread (PNRA), Red Robin Gourmet Burgers (RRGB), Sonic Corp (SONC), Sotheby's (BID), Texas
Roadhouse Inc. (TXRH)

6
Steven Rees North America Equity Research
(1-212) 622-6575 07 October 2009
steven.rees@jpmorgan.com

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2009

Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 39% 46% 15%
IB clients* 56% 57% 42%
JPMSI Equity Research Coverage 38% 51% 10%
IB clients* 76% 72% 56%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
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steven.rees@jpmorgan.com

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