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Carrols' results a troubling sign for BK

Carrols' results a troubling sign for BK

SYRACUSE N.Y. Carrols Restaurant Group Inc., the largest Burger King franchisee, provided the first official glimpse into the No. 2 burger brand’s latest sales trends, and it wasn’t good.

While analysts and observers have predicted that Burger King sales trends would suffer in its latest quarter ended in June, Carrols reported Monday that same-store sales at its BK units fell 4.7 percent for its quarter ended June 2, versus the same quarter a year ago, when same-store sales rose 5.9 percent.

The negative result is the latest evidence — following negative same-store sales at Sonic, Carl’s Jr., Hardee’s and Arby’s — that fast-food chains are suffering from the domestic recession and reduced consumer spending just like their full-service competitors have. In addition, deep discounting among quick-service chains, from $1 items to $5 meals, have hurt sales, dropping the check averages even if boosting traffic.

Miami-based Burger King Holdings Inc. said during its latest conference call in April that it expected “flat to slightly positive” results for its latest quarter. Some analysts, however, expect less. John Ivankoe at J.P. Morgan said it a research note Monday that he expected BK’s fiscal fourth quarter same-store sales to fall 3.5 percent from a year earlier. Ivankoe also downgraded BK’s stock prospects because of the declining sales. Burger King is expected to report its fiscal 2009 results later this month.

“[Quick-service] sales have slowed since March, and we believe lower year-to-year total employment in the U.S. will remain the major drag over the next six months,” Ivankoe said. “Employment is coincident with need- [and] convenience-based quick-service sales, especially in breakfast and lunch where [Burger King] generates over 65 percent of its business.”

Even McDonald’s, which has bucked nearly every negative industry trend, has reported a softening of same-store sales growth. One securities analyst last week even questioned McDonald’s future upside as a stock pick

At Syracuse-based Carrols, which also operates its own Taco Cabana and Pollo Tropical chains, corporate cost controls, more favorable commodity costs and lower interest expense from debt reduction helped offset the slow sales.

Second-quarter net income more than doubled to $7.1 million, or 32 cents per share, from earnings of $3.3 million, or 15 cents per share, in the same quarter a year ago. Carrols slashed its interest expense on the paydown of debt, cut general and administrative costs, and reduced advertising spending.

Total revenue fell 3.2 percent to $203.9 million. Same-store sales fell 3.1 percent at Pollo Tropical and 3.8 percent at Taco Cabana.

“While significant pressures on consumer spending, coupled with aggressive marketing and promotional activity across the industry, negatively impacted our top-line, we experienced a significant improvement in profitability,” Alan Vituli, Carrols’ chairman and chief executive, said in a statement. “[Earnings] more than doubled compared to the year-ago period, due to our focus on cost containment, the easing of commodity and utility costs, and a shift in some advertising spending from the first to second half of the year compared to 2008.”

Vituli said he expected Burger King’s sales trends to improve later this year, driven by “more successful product offerings ... and as year-to-year comparisons become less challenging.”

Carrols' 559 restaurants include 314 Burger King units, 154 Taco Cabana restaurants and 91 Pollo Tropical locations.

Contact Sarah E. Lockyer at [email protected].

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