While deflecting a big investor’s criticisms about depressed stock values and purportedly unchecked corporate overhead and capital spending, the parent of the Carl’s Jr. and Hardee’s brands posted trend-busting first-quarter results that exceeded expectations.
That earnings report came just days after the chief executive of CKE Restaurants Inc. and three other directors were re-elected to its board as shareholders rejected a call for their ouster by the displeased New York investment fund Ramius LLC, which owns 3.6 percent of CKE.
At a time when many operators are reporting bottom-line slumps because of higher commodity costs, CKE posted an 8.3-percent jump in profit to $16.6 million, or 31 cents per share, for the quarter ended May 19, compared with the year-earlier net of $15.4 million, or 23 cents per share.
CKE officials credited expense reduction measures and menu price increases, as well as a share repurchase plan that reduced outstanding shares by 20.4 percent.
However, as the parent of brands known for premium burgers featuring such “meat-as-condiment” toppings as thin-sliced prime rib and pastrami, CKE expects the second quarter to bring new commodity pressures from expected higher prices for beef, wheat and dairy, the company’s officials conceded.
Andrew Puzder, CKE’s president and chief executive, said Carl’s Jr. and Hardee’s would have to raise their menu prices this year to offset inflationary pressures. Though analysts citing Hardee’s nearly $6 Prime Rib Thickburger have questioned whether premium pricing may chase away value-conscious diners, CKE’s chains will not follow competitors down the path of discounting or couponing.
“We market value [differently] than other companies,” Puzder said. “The Prime Rib Thickburger, which was one of the main drivers of our improvements in same-store sales at Hardee’s in the last period, is the most expensive Thickburger we’ve ever sold. But people do perceive that there’s value to that, that they are going to get something that’s worth more than what they pay for it.
“As long as people perceive that as a value, then we are going to be able to continue on this path.”
Under pressure from activist shareholders to reduce spending, however, Puzder recently outlined cuts in the company’s five-year capital plan for 1,923-unit Hardee’s and 1,162-unit Carl’s Jr.
At CKE’s annual shareholder meeting in June, the company disclosed plans to back off on new-unit development for Hardee’s over the next three years, anticipating 86 new restaurants instead of the previously planned 126, a move that is expected to reduce capital spending by $54.2 million.
For the fiscal year ending next January, for example, CKE now expects capital expenditures of $120 million to $130 million to build 24 new Carl’s Jr. units and seven Hardee’s, instead of the $135 million to $155 million and five more Hardee’s previously budgeted.
Puzder said CKE would further cut expenses by slowing the pace of remodeling units and selling up to 40 more Hardee’s locations to franchisees, beyond the 201 already sold over the past year.
Over the next three years, the number of remodels will be cut by 71 units, from 511 to 440, Puzder said, though he underscored that remodelings are vital to improving profitability. Refurbished company units outperform franchised units by 10 percent to 14 percent in Southern California and 7 percent to 9 percent in Northern California, he said.
“When you promote yourself as a premium-burger brand, you want to have a premium-burger look,” Puzder said.
Meanwhile, CKE is boosting growth overseas, recently inking pacts with developers to open a minimum of 100 Carl’s Jr. units in China over the next seven years, and 25 Hardee’s in Pakistan over the next five years.
Over the past four years, 96 international units have opened, accounting for more than half of the chains’ franchised growth, and officials envision the opening of some 600 international units by 2014.
The cuts in capital spending followed public criticism by Ramius LLC, whose nearly 1.9 million CKE shares helped the investor gain attention for what has been a sharp decline over the past year in CKE’s stock value. In a June 17 letter to CKE, Ramius expressed disappointment in the company’s fundamental performance and questioned its “aggressive capital expenditure.”
Fueling the criticisms were declines in CKE’s stock price, which as of early July was in the mid-$12 range, better than its 52-week low of $9.60 but far off its $20.50 high during the past 12 months.
Ramius partner Jeffrey C. Smith wrote that CKE “faces significant macroeconomic headwinds,” and said it was “imperative that the board and management…adjust their business strategy to adapt to this difficult environment.”
Ramius also pointed out that general and administrative spending has remained constant in absolute dollars since 2001, despite a 20-percent decline in the number of corporate-owned Carl’s Jr. and Hardee’s units. The investors urged CKE to consolidate its three corporate offices: an ocean-view building in the Santa Barbara County town of Carpinteria, Calif.; Carl’s Jr. home base in Anaheim, Calif.; and Hardee’s headquarters in St. Louis.
But Puzder said moving corporate staff from Carpinteria to Anaheim actually would increase rent by 13 percent, and he pointed out that a consolidation in the opposite direction was unfeasible since the Anaheim facility houses 328 highly trained information technology and accounting personnel.
“At this point, we have no intention of changing,” he said.
Puzder described Carl’s Jr. as an industry leader in cost containment, saying that in 2001 its operating costs were about 80.6 percent of revenue at company-operated stores, and that the costs had declined to 76.3 percent for the year ended in January 2007, though they rose to 78.5 percent last year.
At Hardee’s, operating costs were about 92.5 percent of revenue at company-owned units in 2001, dropping to an all-time low of 81.9 percent in 2006 before increasing to 83.6 percent last year.
Puzder blamed inflation as the primary reason G&A expenses topped $144 million last year, up from a low of $107 million four years ago.
In the first quarter, however, G&A expense was reduced by $1.5 million, or 3.3 percent, compared with a year earlier, despite a 3.2-percent drop in total revenue to $466.2 million, he said.
Same-store sales rose 3.9 percent for corporate-owned Carl’s Jr. restaurants in the first quarter, and strong sales of the featured Chili Cheese Burger continued to boost results for the first month of the second quarter. Carl’s Jr.’s annualized average-unit volumes have increased $21,000 since the January end of fiscal 2008 to a brand-record $1.5 million.
At Hardee’s, same-store sales were down 0.6 percent for the first quarter, but the Prime Rib Thickburger appeared to be helping second-quarter sales trends. The brand’s average-unit volume of $959,000 is a $5,000 improvement over the end of fiscal 2008, and the highest on record for Hardee’s, CKE said.