$8.9-Million Loss by Karcher Blamed on Lag in Phoenix
Carl Karcher Enterprises Inc. said Thursday that it lost $8.9 million in the fourth quarter largely due to the establishment of a reserve to pay for the restructuring of its struggling Arizona operations.
The 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 on revenues of $118 million compared to net earnings of $4.2 million on revenues 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 revenues 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 failure of many local financial institutions. The firm also cited strong competition, discounting and higher food prices as contributors.
Karcher, which entered the Arizona market in 1983, said that operations in Arizona, 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, which include California, Nevada and Oregon. The company is also trying to expand its international presence with restaurants in Japan and those 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 and 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.’ ”
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.
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.
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 Jr. stores. Wisely said that the restaurants in Tucson, which is viewed as a separate media market from Phoenix and is not as sprawling, have approached an average of $19,000 in weekly sales, 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 but is “taking a more cautious approach” in its expansion plans.
He said the company opened 52 restaurants in the previous fiscal year but is scaling down its expansion to 30 company-owned stores in the present year, with another 15 being introduced by franchisees.
“You can see we had a disappointment on the earnings side,” he said in explaining the slowdown in expansion. “You want to grow on the revenue side, but you must bring more to the bottom line.”
KARCHER ENTERPRISES RESULTS AT A GLANCE
In millions of dollars
4th Qtr 4th Qtr 1990 1989 1990 1989 Revenue 511.3 445.9 118.0 111.3 Profit (loss) 5.6 20.8 (8.9) 4.2
Fiscal year ends Jan. 29, 1990
EMPLOYEES: 15,110 restaurant workers and 650 in the executive office.
RESTAURANTS: 553 company and franchise units, including 30 opened last year.
LOCATIONS: 233 units in Southern California, 144 in Northern California and 29 in Arizona.*
AVG. SALES: $23,000 per week in California.
KEY EXECUTIVES: Carl N. Karcher, chairman and chief executive officer, and Donald F. Karcher, president and chief operating officer.
* Company-operated units as of Jan. 25, 1989.
Source: Carl Karcher Enterprises
