Investments Help : Karcher Reports Rise of 15.6% in Quarter’s Income

The recently introduced chicken club sandwich may give Carl Karcher Enterprises Inc. reason to cluck with joy in the future, but its fiscal third-quarter and nine-month earnings provide little to squawk about.

The Anaheim-based operator of Carl’s Jr. fast-food restaurants saw its net income for the third quarter ended Nov. 3 increase 15.6% to $1.78 million from $1.54 million in the same quarter last year. But without $1.7 million in income from investments, the company would have reported a $648,000 operating loss for the quarter.

Operating in an industry that has been somewhat sluggish, Karcher also reported that its revenues for the quarter fell slightly to $74.2 million from $75 million in last year’s third quarter.

The picture was similar for the company’s nine-month period. Net income rose 9.5% to $4.2 million from $3.8 million in the same period last year. But the earnings were fueled by $7.8 million in gross investment income, which offset a $3.6-million operating loss.

Revenues for the nine-month period fell 3.6% to $240.8 million from $249.7 million.

“Back on Course”

“While our total recovery has some distance to go, I believe we have turned the corner and the ship is back on course,” Donald F. Karcher, president and chief operating officer, said in a prepared statement.

He pointed out that quarterly pretax operating “earnings” improved by more than $1 million--to a $648,000 loss from a $1.8 million loss. For the nine-month period, however, pretax operating losses grew worse--to $5.4 million from $3.1 million.

Loren Pannier, Karcher’s chief financial officer, said in an interview that the company’s performance should be judged by the bottom line and not the individual components in its incomes statement. “We have assets in restaurants, a food processing plant and investments,” said Pannier. “We’re trying to maximize all our assets. I don’t think we should apologize for making money from our investments.”

Karcher’s investment earnings come from $45 million in previous earnings and cash flow and in capital raised in public offerings.

But nearly all of the company’s revenues come from restaurant, food service and franchise operations. And the 458 Carl’s Jr. restaurants have experienced the same tough market that other fast-food chains have seen in the last year or so.

“Other people are having a tough time,” said Sarah Stack, an industry analyst with the investment firm of Bateman Eichler, Hill Richards Inc. in Los Angeles. “Revenue growth has been flat.”

But, she said, fast-food patrons have been “very selective,” and have favored chains such as McDonald’s, Kentucky Fried Chicken and Burger King. Consumers also have less money to spend and more fast-food locations to choose from, she said.

“Other restaurateurs who have a well-defined concept, good service and consistent food quality are doing well,” she said. “I patronize these stores, and I don’t see a concept (at Carl’s Jr.) that is any more well-defined than it has been. I know what I’m going to get at McDonald’s. In the last 18 months, I don’t know what I’m going to get at Carl’s.”

Carl’s Jr. has had a yearlong “back to basics” strategy with lower prices and greater emphasis on hamburgers and French fries. Apparently as part of the program, the chain introduced an untraditional but recently popular item in fast food establishments--chicken.

In his prepared remarks, Karcher said customer reaction to the new chicken club sandwich in the last month has been “extremely positive” and sales have increased.

“We’re working to clarify that we are a fast-food restaurant, but with more than just hamburgers,” said Pannier.