Karcher Posts an $8.9-Million Loss in Quarter

Carl Karcher Enterprises Inc. said Thursday that it lost $8.9 million in the fourth quarter, largely because of the establishment of a reserve to pay for the restructuring of its struggling Arizona operations.

The Anaheim-based company set aside $14.5 million in the three-month period ended Jan. 29 for the restructuring, which could involve the sale, closing or franchising of its 40 Carl’s Jr. outlets in Arizona.

“It has become apparent that the Arizona market does not make economic sense for corporate operations,” said Donald F. Karcher, the company’s president and chief operating officer. “The future investment required would be prohibitive in view of the expected return.”

The fourth-quarter loss was on revenue of $118 million, compared to net earnings of $4.2 million on revenue of $111.3 million for the same period a year ago. For the year, the company’s earnings slumped to $5.6 million on revenues of $511.3 million from $20.8 million on revenue of $445.9 million a year ago.

Company officials attributed the fourth-quarter loss to the soft Arizona economy, which is depressed because of a real estate slump and the failure of many local financial institutions. The firm also cited strong competition, discounting and higher food prices as contributors.

Karcher, which entered Arizona in 1983, said operations there, particularly in the Phoenix area, have been a drain on earnings. The fast-food firm estimated that it lost $5 million in the state last year.

Karcher said the company wants to redirect into stronger markets, including California, Nevada and Oregon. The company is also trying to expand its international presence with restaurants in Japan. Others are planned for western Canada and Asia.

“We will now focus our resources on our other proven markets,” Karcher said in a prepared statement.

The company’s stock closed at $9, down 25 cents in trading Thursday on the New York Stock Exchange. But industry analysts viewed Karcher’s decision to reorganize, and possibly abandon, Arizona as a good one.

Steven A. Rockwell, a fast-food industry analyst for Alexander Brown & Sons in Baltimore, said the company was sound but was not willing to withstand losses for several years in a depressed market. “Carl’s just said, ‘enough is enough,’ ” he said.

Karcher officials said the chain, which has 553 company-owned and franchised restaurants that carry its distinctive Happy Star logo, has faced a series of obstacles ever since entering the Phoenix market seven years ago.

Robert W. Wisely, Karcher’s group vice president for marketing, said that some of the best locations and opportunities for reasonably priced leases had been grabbed by competitors by the time the first Carl’s Jr. restaurants were being established in Phoenix.

Greater Phoenix’s suburban sprawl holds down sales because many areas are not densely populated enough to generate adequate sales volume at individual stores, he said. Advertising is expensive because of competition for the airwaves from manufacturers that have discovered Phoenix as a test market.

In the less-developed Tucson market, however, Karcher has prospered enough that it was able to buy out eight former Wendy’s locations to give it a total of 14 Carl’s Jrs. Wisely said that the restaurants in Tucson, which is a separate media market from Phoenix and is not as sprawling, have approached an average of $19,000 in sales a week, compared to $23,000 in the average Carl’s Jr. restaurant in California.

Though the market remains lucrative, Wisely said that the Tucson operations would become too unwieldy to manage from afar if the Phoenix restaurants are sold off or franchised. A Flagstaff outlet is already franchised.

Despite the financial problems in Arizona, Loren Pannier, Karcher’s chief financial officer, said the company is still growth-minded in its proven markets.

“The whole exportability of Carl’s Jr. is alive and well,” he said. “What we have is the weak link of Phoenix.”