California Pizza Kitchen, which has 163 corporate locations and 16 franchises in the U.S., announced Thursday that it filed for Chapter 11 bankruptcy.
Before filing, the brand entered into a restructuring agreement with senior lenders that will reduce debt by $230 million (from $403 million to $174 million) and provide $46.8 million in financing to continue operations, pay vendors and employees, and provide for ongoing commitments to stakeholders. California Pizza Kitchen aims to exit the bankruptcy process in under three months.
“Today’s announcement is a step towards a stronger future for California Pizza Kitchen,” CEO Jim Hyatt said in a statement. “The unprecedented impact of COVID-19 on our operations certainly created additional challenges, but this agreement from our lenders demonstrates their commitment to CPK’s viability as an ongoing business. Throughout this process we will continue to deliver the same innovative, California-inspired cuisine that we have been serving for over 35 years.”
Because dine-in represented 78 percent of sales, the closure of dining rooms greatly impacted operations. By the final week of March, weekly net sales were $2.5 million, compared to $11.3 million in the year-ago period—a 77 percent drop. The company closed 46 restaurants that weren’t suitable for off-premises.
In its pivot to off-premises only, the brand leveraged web-based delivery and relationships with Uber Eats, Grubhub, Postmates, and DoorDash. It also created CPK Market, a way for customers to purchase traditional menu items and grocery items.
Since then, net sales have recovered somewhat, but were still down more than 40 percent in the last week of June.
Outside of COVID pressures, the brand cited three main reasons for the bankruptcy—the emergence and growth of fast-casual dining, decrease in foot traffic around malls, and the rise in third-party delivery services.
In recent years, the company responded by increasing efficiency in its locations, streamlining menus, and reducing excess costs. For example, the brand focused on a more value and speed-focused lunch menu to compete with fast casuals and worked to meet market trends by leveraging Cali-health offerings.
Despite the initiatives, the brand faced liquidity issues in 2018 and 2019. To reevaluate its operating strategy and brand identity, California Pizza Kitchen hired a new management team that implemented a multi-year strategy aimed at improving the brand’s financial position.
In the fall of 2019, the company retained Guggenheim Securities and Kirkland to explore M&A and possible restructuring transactions. The restaurant then initiated a marketing process to sell the company. It drew serious interest, but the COVID pandemic paused the efforts.
In the first two months of the year, the brand generated positive net cash flow before financing activities. But from the last week of March through June, net cash flow before financing was –$18.9 million.
“The company’s projections demonstrated that to weather this environment the company needed imminent access to liquidity as well as marked adjustments to its operations,” the filing stated.
Soon after the pandemic began, California Pizza Kitchen received a $30 million bridge loan to continue operations, but it was only a temporary solution. The restaurant has exhausted the loan and only has $13.5 million of cash on hand. There’s also roughly four months of unpaid rent obligations at most locations.
The restructuring agreement, which includes the continuation of the sale process, is meant to position California Pizza Kitchen for long-term success, save thousands of jobs, and ensure landlords and vendors have a viable partner going forward, according to court documents.
“After an extensive review process, the restructuring support agreement and Plan present the only viable path forward that results in CPK’s business continuing as a going concern,” the filing states. “For these reasons and the other reasons described in this declaration I believe that the restructuring support agreement and Plan represent the value-maximizing path forward.”
Across the country, full-service restaurants have been rocked by the pandemic. According to The NPD Group. Visits to full-service concepts were down 47 percent in April, May, and June.
California Pizza Kitchen joins what will continue to be a growing list of restaurants who’ve declared bankruptcy amid the pandemic. Some notable brands include FoodFirst Global Restaurants, Sustainable Restaurant Group, Chuck E. Cheese, and Garden Fresh Restaurants.