Krispy Kreme Doughnuts

(KREM)

, of all companies, has stolen the IPO show outside of tech this year. But if the 328% rise in Krispy Kreme's shares was unexpected, consider another improbable winner from the new-issue food group:

California Pizza Kitchen

(CPKI)

, a restaurant chain with a history of expansion problems that didn't figure to stir much of an investor appetite.

At a time when many restaurant stocks are lagging for the year, despite strong customer traffic, Los Angeles-based California Pizza Kitchen has so far found the right recipe. The stock, which Thursday closed up $2.44, or 9.5%, to $28.19, is 88% above its Aug. 2 debut at $15 and has been as high as $29.75.

Pricey Pizza?
California Pizza Kitchen stock climbs, but investor expectations may be too high

But even a robust third-quarter profit report, which was released this week, can't chase doubts about the company. Not only is California Pizza Kitchen stock vulnerable because of high expectations -- the shares are currently trading at 37 times next year's projected earnings, more than twice the industry average -- but boom-and-bust stories are as common in the restaurant business as tuna on white.

"This is going to be a great short," says a New York hedge fund manager who has no position in the stock but suggests that investors could profit by betting the stock will fall, a practice called short-selling. In the manager's view, everyone in the dining business is in peril because of the portent of a sagging economy and rising costs.

Eat Up

If there's worry in the California Pizza Kitchen ranks, it doesn't show. Customers, in fact, are pouring into the chain's 108 units. For the quarter ended Sept. 30, sales at existing outlets -- a critical industry measurement -- were up a robust 9%, far exceeding analysts' expectations and nearly five times the figure of the comparable 1999 quarter.

The sales boost drove a 36% jump in quarterly earnings per share to 19 cents. The performance, up from 14 cents in the comparable 1999 quarter, beat analysts' estimates by 3 cents. Revenue also was strong, up 17% to $55 million.

All this because of pizza? Not quite. Pizza does account for a third of the company's business and pizza-making has gone to new heights (or lows, if you prefer) at the operation, which sprinkles all sorts of exotic ingredients on its offerings. Would you believe Peking duck pizza? Philly cheesesteak pizza? Pizza prepared with Alfredo sauce? All true, and how very LA.

More than anything, though, California Pizza Kitchen has prospered because it caters to what's known in the trade as a casual dining crowd. It's a clientele, made up largely of aging baby boomers, that seeks more than the

Denny's

experience but doesn't want the check to get too big.

Casual Dining

"Casual dining is the power alley in the industry right now," says Allan Hickock, analyst with

U.S. Bancorp Piper Jaffray

. (His firm hasn't done underwriting for California Pizza Kitchen.) "It has the most demographic strength behind it, the 35-45-60 age bracket. They're in their peak earnings years."

What these coveted diners get at California Pizza Kitchen is a glossy restaurant awash in yellow and black with a sound system that pumps out boomer music from the likes of

Carole King

and

Foreigner

. For eating out, patrons also learn to love the check: The average bill is $10.50.

Oddly for an IPO these days, California Pizza Kitchen had a track record. But it isn't altogether pretty. The chain was started in 1985 by two Los Angeles lawyers who later sold to

PepsiCo

, which bungled an expansion program. Outlets were closed and sales at some remaining restaurants fell.

A New York investment firm bought the company in 1997. Under Frederick Hipp, a veteran industry executive who was named chief executive in 1998, the company has straightened out the business and struck out in some new directions, including selling frozen pizzas in supermarkets through a joint venture with

Kraft

and extending quick-service outlets from airports to malls.

Go East

Nearly half of the company's restaurants are in California, but it is gradually extending its reach. At least 14 new full-service units are planned for 2001.

Analysts for investment banking firms that underwrote the company's IPO see such bright prospects for the chain that they have been raising earnings estimates as far out as 2002. "We continue to grow increasingly confident in the strength of the existing unit base, and more importantly, in the ability of management to aggressively grow the California Pizza Kitchen concept in the coming quarters," says Stacy Jamar, an analyst for lead underwriter

Banc of America Securities

.

But the skeptics are out in force, too. Many of them have long memories about fizzled restaurant fads (remember

Chuck E. Cheese

and

Planet Hollywood

?) and think that it's just a matter of time before the attraction wears off.

The stock's valuation also is worrisome. Even fans like Dennis Forst, an analyst at

McDonald Investments

, say that the company's stock price has gotten ahead of profit expectations. "They're up in pretty lofty company," says Hickock.

Carey Carrington, the company's chief financial officer, says that those who doubt California Pizza Kitchen's endurance overlook its extensive history and growing business diversity. "We have a long tradition," he says. "Barbecue chicken pizza started with us as the No. 1 seller 16 years ago and it's the No. 1 seller now."

What's more, his outlook on costs is nothing alarming, he says. "We don't see any price pressure in any one area at all," he says.

But with the high stock valuation and other issues hanging over California Pizza Kitchen, the stock could very well wind up as just so much wilted lettuce. Meantime, B.L.T. pizza, anyone? With a little mayo?

As originally published, this story contained an error. Please see

Corrections and Clarifications.