CKE Shares Dive 29% as Profits Continue Slide

CKE Restaurants Inc., the No. 4 U.S. burger chain, warned Monday of disappointing fiscal second-quarter earnings because of lower sales and profit at its Carl’s Jr. and Hardee’s restaurants, sending its shares tumbling.

It’s the fourth straight quarter in which CKE warned earnings won’t meet expectations.

Second-quarter earnings will be 19 cents to 21 cents a share, much lower than the 33-cent average estimate of analysts polled by First Call Corp. CKE further warned that Carl’s Jr. and Hardee’s could be a drag on earnings in the third and fourth quarters.

CKE’s stock fell 29%, or $3.94, to $9.63 a share, the 11th largest percentage loss Monday on U.S. markets. Earlier in the session, the shares fell to $9.13, their lowest level in more than three years. In the last year alone, the stock has lost about 73% of its value.

Nearly 3.6 million shares changed hands, about 8 times the daily volume over the last three months.

The recasting of Hardee’s restaurants into a new Star Hardee’s format, with improved menus and service and charbroiled burgers, is moving more slowly than CKE expected. Carl’s Jr. faces tough competition on the West Coast.

“CKE continues to struggle on two coasts,” said Robert Derrington, an analyst at SunTrust Equitable Securities in Nashville, Tenn. “This is an extremely competitive segment,” said Derrington, who has an “attractive long-term” rating on CKE shares. “All the players are ratcheting up advertising and new product introductions.”

Hardee’s is in the eastern half of the U.S., where competitors include industry leader McDonald’s Corp., Wendy’s International Inc. and the Burger King chain of Diageo Plc. It’s posting strong breakfast sales, though its lunch and dinner sales continue to lag, Derrington said.

CKE also owns the Taco Bueno chain of Mexican restaurants in Texas and Oklahoma.

In April 1998, CKE bought 557 Hardee’s restaurants from Advantica Restaurant Group Inc. for $426.4 million in cash and assumed debt, bring its total Hardee’s locations to about 2,800. About half of them are company-owned, and the rest franchised to independent operators.

CKE intends to convert them all to Star Hardee’s by 2002. The revamping includes a new advertising campaign, as well as remodeling of restaurants.

The acquisition hasn’t yet paid off, though. Sales at Hardee’s restaurants open at least one year will probably fall 6% in the second quarter, while Carl’s Jr. same-store sales will probably fall 4.5%, said analyst Mark Sheridan at Johnson Rice & Co. In CKE’s fiscal first quarter, same-store sales at Hardee’s and Carl’s Jr. both fell 4.8%.

In the second quarter last year, the company earned $22.6 million, or 42 cents a share, on sales of $474.8 million.

“They’ve clearly underestimated the task of reversing their same-store sales slide,” Sheridan said. He has a “hold” rating on CKE shares, the firm’s lowest rating.

William Foley is stepping down as CKE’s chief executive next year to devote more time to his duties as chairman and CEO of Fidelity National Financial Inc., an insurance and real estate company that recently agreed to acquire Chicago Title Corp., a consolidation that would create the nation’s largest title insurance company.

He’s also chairman of Checkers Drive-In Restaurants Inc., another fast-food restaurant chain. At CKE, President Tom Thompson will step up to the chief executive position.

“Foley’s interest in CKE has been as an investor, not an operator,” said Schroder & Co. analyst John Ivankoe, who has a “perform in line” rating on CKE. “He’s approached this all along from a financial point of view.”

CKE expects to report second-quarter earnings Sept. 9. The fiscal second quarter ended Aug. 9.

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Stock Slump

CKE Restaurants’ shares have lost about 73% of their value over the last year amid weak sales at various chains. Weekly closing prices and Monday’s close:

1998

Aug.

7 $30.91

14 35.73

21 32.89

28 30.23

Sept.

4 30.34

11 28.30

18 25.63

25 26.36

Oct.

2 24.55

9 20.91

16 15.63

23 21.59

30 23.92

Nov.

6 21.98

13 19.03

20 19.03

27 19.48

Dec.

4 26.02

11 28.23

18 25.73

25 27.00

Jan.

1 29.44

8 26.75

15 26.06

22 25.13

29 23.75

Feb.

5 21.88

12 22.75

19 23.75

26 26.56

Mar.

5 24.50

12 24.63

19 18.00

26 19.06

April

2 19.75

9 14.50

16 16.44

23 16.06

30 16.56

May

7 17.25

14 18.38

21 18.88

28 18.38

June

4 13.25

11 13.19

18 13.13

25 13.75

July

2 16.13

9 15.94

16 14.63

23 13.81

30 14.00

Aug.

6 13.56

13 13.56

Monday’s close: $9.63

Source: Bloomberg News