New Franchise Strategy Unveiled by Carl Karcher : Fast-food industry: The Anaheim-based company hopes to fuel expansion by selling 57 Carl’s Jr. outlets in Northern California.
In an effort to fuel expansion, Carl Karcher Enterprises Inc. said Friday it plans to sell 57 company-owned Carl’s Jr. restaurants in Northern California to franchisees over the next two years.
“Our franchise strategy will greatly enhance the company’s long-term growth, spread the challenge of developing properties and raising capital, and cushion the volatility of economic cycles,” said President and Chief Operating Officer Donald F. Karcher.
According to the plan, all Carl’s Jr. restaurants in a geographic region ranging from Ukiah to Lompoc will be sold to franchisees. The buyers will be asked to open an additional 80 Carl’s Jr. restaurants in Northern California in the next five to 10 years.
Analysts said the franchising arrangement will allow Carl’s to expand faster in Northern California because the franchisees will pay for new construction.
“The economic times in the restaurant industry being what they are, restaurants are trying to do all they can to keep afloat and growing,” said Janet Lowder, owner of Restaurant Management Services in Rancho Palos Verdes. “It’s a great opportunity to get into a franchise now, but Carl’s better have financing (for expansion) lined up for the people coming in.”
The company’s proportion of franchised restaurants is considered low by fast-food industry standards, said Lowder. Currently, 23.7% of Carl’s Jr. restaurants--133 of 561--are franchised. The company aims to increase that ratio to 40% in the next four to five years.
Earlier this year, Carl’s closed or franchised its 40 company-owed restaurants in Arizona, where the company said it was losing $5 million a year. The Arizona franchises were taken over by former company managers and Frank Karcher, the youngest brother of the company’s founder.
In Northern California, Robert W. Wisely, a former marketing director for the company, has already bought one six-restaurant franchise, and a second sale of eight outlets to an unnamed franchisee is under way. The company is currently seeking more buyers.
“This is a continuation of their strategy to focus on the Southern California market, to focus on their more profitable area,” said Steven Rockwell, a restaurant analyst with Alex. Brown & Sons in Baltimore. “Reducing debt is one of their major objectives.”
Carl’s stock, which closed Friday unchanged at $6.50, is considered undervalued by some analysts. Doug Christopher, an analyst with Crowell, Weedon & Co. in Los Angeles, said he believes the stock price is low because of the company’s high debt-to-capitalization ratio, which is 80%, contrasted with a 50% average for the industry.
“The public doesn’t like debt right now, but what matters is (that the company is) making money,” Christopher said. “They have no financial problems whatsoever.”
For the first half of the fiscal year ended Aug. 13, the company reported revenue of $282.1 million, compared to $271.7 million for the same period a year earlier. Earnings were $10.3 million during the first half of this year, compared to $10.4 million for the first half of last year.
The company said the figures are encouraging in light of heavy discounting among its competitors. Carl’s Jr. restaurants are shooting for the higher end of the fast-food market with a fancy selection of burger toppings and a low-calorie menu.
The company has said it wants to redirect into stronger markets, which include California, Nevada and Oregon. It has also begun expanding, under licensing agreements, into Japan and western Canada and last month announced an agreement with a Mexican company to open 10 Carl’s Jr. outlets south of the border over the next five years.
