Karcher Reverses 2-Year Slump With Rise in Net Income

Times Staff Writer

After a two-year slump, Carl Karcher Enterprises Inc. on Wednesday reported a near fivefold jump in net income--to $4.2 million--for its fiscal 1988 first quarter and appears to be ready to take a big bite of California's fast-food market.

The Anaheim-based chain, owner and franchisor of 438 restaurants in California and Arizona, said it plans to add 100 Carl's Jr. outlets over the next three years, introduce a new menu item and begin a new ad campaign. "We want to be the strongest regional chain in the U.S.," President Donald Karcher said in an interview after the annual shareholders meeting Wednesday. Karcher told about 300 shareholders at the meeting that Karcher Enterprises is finally seeing the results of its "back-to-basics" strategy, launched in 1985, which included spiffing up its older outlets and dropping such marketing disasters as rainbow trout and sirloin steak dinners.

For the quarter ended May 18, the firm reported record quarterly revenue of $104.7 million, a 15.7% increase from $90.5 million for that period a year earlier. Net income rose from $887,000 reported a year ago.

The company also said its directors have approved a 3-for-2 stock split payable Aug. 7 to shareholders of record July 17.

Wall Street analysts said that the split should spark trading among smaller investors and that it shows that Karcher Enterprises believes that it has turned the corner.

But even without the split, Wall Street reacted enthusiastically Wednesday to the news that Karcher Enterprises has overcome its fiscal doldrums. In over-the-counter trading Wednesday, Karcher shares closed at $26.62, up 87 cents on the day on volume of 302,700 shares. The stock hit a record high of $27 during the day, surpassing the previous record closing high of $26.75 for Aug. 10, 1984.

Analysts traced Wall Street's interest to Karcher Enterprises' strong first quarter earnings of 56 cents per fully diluted share--higher than the company's previous estimate of 35 cents to 40 cents per share. "People thought I was a fruitcake when I (predicted) 45 cents per share--then (earnings) came in above my expectations," said James J. Murren, a research analyst with the New York securities firm of C.J. Lawrence Inc. Murren said he expects earnings this year to hit $1.85 and to reach $2.20 within 24 months.

The change in Karcher Enterprises' fortunes has been astonishing. The chain, once fast-growing, reported a net loss of $7.1 million for the 1987 fiscal year ended Jan. 16 and reported comparatively sparse net earnings of $5 million a year earlier. Much of the 1987 loss came from a one-time $15-million reserve for costs incurred in the closing of 20 company-owned restaurants in four states in January. In addition, the company also launched an austerity program that included a series of layoffs and deferring plans to become a 1,000-unit national chain.

The turnaround apparently came with the introduction of chicken club sandwiches last fall and with the remodeling, Karcher said. Of the 360 company-owned restaurants, the 220 that have been remodeled have shown a 10% average increase in sales. The company expects further sales increases throughout the year as the remaining outlets are remodeled.

Karcher said that despite the closings, the company has not given up hopes of becoming a national chain. "We're certainly not thinking of it for several years," he said. More immediately, Karcher said, the company may sell "no more than five" restaurants in California if they cannot be made profitable.

To further increase its share of the California market, the chain will introduce a "country fried steak sandwich" in all Carl's Jr. stores outside of Los Angeles and Orange counties. In addition, a major ad campaign this month will promote new "all-you-can-drink" self-serve beverage bars, Karcher said.

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