California Pizza Kitchen Emerges from Bankruptcy

Given the timing, one might be tempted to lay blame for California Pizza Kitchen’s capitulation at COVID’s doorstep. After all, by the time CPK filed for Chapter 11 bankruptcy protection on July 30, the list of notable restaurant companies overcome by the weight of financial obligation was already substantial, fairly star-studded, and growing. The Playa Vista, California-based operator of more than 200 ”California cuisine-inspired” Italian restaurants worldwide (roughly 180 of which are in the U.S.) was simply the latest victim of an unforgiving pandemic.

And yes, for a company that generated nearly 80% of sales from dine-in customers, the staggering 77% year-over-year drop in weekly net sales by the end of March can only be classified as “COVID carnage”. However, a look at the Company’s history, and its journey through the bankruptcy process, reveals that, for all of its myriad sins, in this instance, COVID merely served as an accelerant.

Long before the first stay-at-home order or pandemic-related closure, mounting pressure from “fast-casual” competitors, third-party delivery providers, and an ongoing decrease in mall traffic already had CPK on a fraught path. The business was suffering severely as far back as 2018, resulting in liquidity concerns, mounting debt, a management overhaul intended to rehab the Company’s finances, and, in the fall of 2019, the engagement of Guggenheim Securities and Kirkland to explore strategic options. According to company filings, 61 “relevant strategic and financial parties” were contacted, with thirty nondisclosure agreements executed and confidential information presentations were given… and then, COVID.

It’s fairly safe to assume that the process would have yielded something in the absence of the pandemic. However, as evidenced by CPK receiving – and exhausting – a $30 million bridge loan between the onset of the pandemic and its bankruptcy filing, the writing was on the wall, and rather clear: CPK, as previously constituted, was not long for this world.

At the time of the bankruptcy filing, CPK had suffered a cash outflow of $18.9 million in its most recent quarter (ending in June), had just $13.5 million in cash on hand, and hadn’t paid rent at most locations for four months, and wasn’t paying interest on its $400+ million debt load. CPK had closed 46 restaurants that couldn’t operate via off-premises, including 17 non-franchise U.S. locations.

During the course of bankruptcy proceedings – which the Company has estimated would require no more than three months – CPK closed another eight restaurants (at the time of writing no additional closures are planned) and negotiated more than $67 million in rent savings through 2024.

Ultimately, an October 2 deadline was set for buyers to submit bids for “some, all, or substantially all” of CPK’s assets, with a final auction slated for the morning of Thursday, October 8.

Imagine throwing a party, inviting just about anyone that comes to mind, making kind of a big about it… and winding up in an empty house because, frankly, no one could really be bothered. It’s a nightmare scenario. Simply typing out that hypothetic scenario was frankly kind of brutal.

Welcome to autumn 2020 at CPK. Despite the Company’s best efforts, that October 2 deadline came and went, with four written indications of interest or proposals from potential buyers and… zero qualified bids, resulting in the cancellation of CPK’s asset sale.

Fortunately, the situation for CPK was neither so cut-and-dry nor so bleak. The company’s plan for restructuring had laid out a pair of avenues to increased solvency through a significant debt reduction. That ill-fated asset sale was but one. The other would involve negotiations with lenders in order to reduce debt. This proved far more fruitful.

On October 29, after “months of negotiating”, a federal bankruptcy court in the Southern District of Texas approved a plan allowing CPK to emerge from bankruptcy with just $177 million of debt, including financing to support the business in its re-emergence. The agreement allowed for the elimination of $225 million (0r 56.1%) of CPK’s pre-bankruptcy $403 million debt load. Under the terms of the nearly-unanimously-approved restructuring agreement, 96.5% of the CPK equity is now held by first-lien lenders, with unsecured creditors splitting the remaining 3.5%, plus $1.75 million in cash. Additionally, the Company’s lenders agreed to fund a new credit facility valued at $107.7 million, with $46.8 million in new money loans.

Over the past few months, we’ve examined the stories of companies whose foresight and strategic flexibility have allowed them to thrive during the pandemic, and command top dollar in an acquisition. We’ve also looked at emerging trends in the restaurant space and technologies that will help eateries to succeed going forward.

It’s worth noting that CPK has not been bashful about change in the past, both technologically and in its recipes. From the 2015 rollout of its internal “PizzaWise” app – which gives employees easy access to recipes while at their stations, and allows for “push updates” to materials and information across all locations – to becoming the first national restaurant brand to introduce cauliflower pizza crust in 2018, CPK’s brand isn’t synonymous with stodginess.

Similarly, attempts were made in early 2020 to allow the Company to weather the pandemic, from an increased focus on off-premises models, including web delivery and relationships with Uber Eats, Grubhub, Postmates, and DoorDash. Most interesting was the April 2020 introduction of CPK Market, which allows customers to purchase not only traditional menu items and specialty meal prep kits, but also beer and wine, as well as a range of traditional and grocery items, including bread and crackers, raw produce, eggs dairy products, raw meat, and seafood.

Perhaps these attempts were simply “too little, too late”. More likely is that CPK’s massive financial obligations were always going to force a difficult reckoning. The truth, as it annoyingly tends to, resides somewhere in the middle. Whatever the case, today, a far leaner CPK is about to set about authoring its next chapter.

At the time of the bankruptcy filing CEO Jim Hyatt said that “This proactive filing will allow us the ability to reduce our long-term debt load and emerge as a much stronger company”. It’s now vital that the “new CPK” commit to this reemergence, not only by taking advantage of greater financial viability in the short term but by continuing to develop an infrastructure that keeps the Company as far as possible from the brink.

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