$2.1-Million 3rd-Quarter Profit Signals Strong Recovery for Karcher Enterprises

Carl Karcher Enterprises reported Wednesday that its earnings climbed 16.7% during its fiscal 1988 third quarter--despite a $2.4-million paper loss resulting from the stock market collapse.

The Anaheim-based fast-food chain posted a $2.1-million profit for the three months ended Nov. 2, up from $1.8 million a year earlier. Sales rose 19.2%, to $88.5 million from $74.2 million in the same quarter last year.

For the first nine months of its fiscal 1988, Karcher Enterprises reported net earnings of $11.8 million, nearly triple the $4.2 million earned in the same period last year. Nine-month revenues rose 16.5%, to $280.7 million from $240.8 million.

The earnings are the latest indication that Karcher Enterprises’ “back-to-basics” strategy is working and that the company--which owns and franchises 438 Carl’s Jr. restaurants--is squarely on the road to recovery, industry analysts said.

After a two-year slump, the company early this year began tightening its corporate belt, running new ads and literally cleaning up its act by spiffying up the older of its outlets.

Those efforts--plus the introduction of such new products as chicken-fried steak and chicken club sandwiches--started giving Karcher Enterprises something to crow about as early as its fiscal 1988 first quarter.

“The reported earnings do not reflect at all what’s going on in the company,” said James J. Murren, a restaurant analyst in New York City with C.J. Lawrence.

Murren was referring Karcher’s decision to subtract from its third-quarter earnings a so-called unrealized loss of $2.4 million, incurred when the value of its investment portfolio plummeted in the Oct. 19 stock market collapse. An unrealized loss is one in which the value of an asset declines but, because the asset has not been sold, the company actually has no real monetary loss.

Net income for the third quarter also included an extraordinary item: an $860,000 tax benefit from a previous quarter’s net operating loss that came largely from the costs of eliminating unprofitable units in Texas and Arizona. For the first nine nine months, Karcher reported a $2.3-million tax benefit.

Karcher’s sales actually “were outstanding and operating costs were phenomenal,” Murren said.

If the company’s investment portfolio recovers in the fourth quarter, he said, Karcher “can reverse that charge” that was taken for losses on investments.

Average sales at Carl’s Jr. restaurants are at a record high of about $902,000 per year, up from $746,900 one year ago.

During the third quarter, the company’s customer counts were up 19%, while the average guest check was up 7% from a year ago.

Donald F. Karcher, president and chief operating officer of Carl Karcher Enterprises, said the company has had “more than a year of positive real growth. Real growth--sales increases adusted for menu price increases--was 20% for the third quarter, following 15% for the second quarter and 10% for the first quarter.”

With the corporate housecleaning and new menu items, Murren predicted that Karcher Enterprises will top $4 million in the fourth quarter.

“The sales leverage was always there,” Murren said. “They were overextended and ignored the basic business for too long.”