Carl’s Jr. Parent CKE Says Earnings Will Fall Short of Forecasts
In a warning that stunned Wall Street, CKE Restaurants Inc. said Wednesday that its earnings in the fiscal first quarter will fall significantly below analysts’ estimates because of lower-than-expected sales at two major chains, Hardee’s and Carl’s Jr.
Anaheim-based CKE said it expects earnings of 35 cents to 37 cents a share for the quarter ended May 17, below the 45-cent average estimate of analysts polled by First Call Corp.
CKE, the fourth-largest hamburger chain in the U.S., has had ongoing problems with the performance of its Hardee’s restaurants, but the disappointing sales at Carl’s Jr. restaurants came as a surprise to analysts.
The stock fell 24%, or $4.31 a share, Wednesday to $13.75 in heavy trading on the New York Stock Exchange. At one point, the shares were off nearly 30%. A total of 6.07 million shares traded, more than seven times the average daily volume over the last three months.
The Carl’s Jr. projections “spooked the investor,” said Allan Hickock, an analyst with U.S. Bancorp Piper Jaffray. He lowered his rating on CKE shares to “neutral” from “buy” on Wednesday, but he still recommends the stock for the long term.
In its latest in a string of profit warnings, CKE said sales were hurt by slow remodeling of Hardee’s hamburger restaurants into Carl’s Jr. and Star Hardee’s, which boast improved menus. The Carl’s Jr. chain, typically a strong sales performer, also was hit hard by competition.
Sales at company-operated Carl’s Jr. restaurants open at least a year were off 4.7% for the quarter, the company said.
C. Thomas Thompson, president and chief operating officer of CKE Restaurants, said the brand had gotten away from its focus on hamburgers.
“We promoted our steak sandwich and Western crispy chicken sandwich,” he noted. “They were excellent products, but we really have been a place for big burger lovers.”
Some analysts pointed out that the chain had no new product like the steak sandwich to fuel sales. After the company launched the steak sandwich in 1997, same-store sales, a key indicator of performance in the industry, surged 10% in the fourth quarter of 1997 and 5% in the first quarter of 1998.
“They are lacking some of that promotion they had fueling same-store sales last year,” said Robert Derrington, an analyst with Sun Trust Equitable Securities in Nashville, Tenn.
In an effort to recapture some of the lost ground, Carl’s Jr. introduced a cheaper bacon cheeseburger last month and plans to add a new burger to the menu this summer.
The chain “is taking a much more aggressive value stance in order to fight back against the inroads that the competition has made in the past 12 months or so,” Derrington said.
Thompson said almost 25% of the decrease in the Carl’s sales is due to sluggish sales at the 63 restaurants in Oklahoma and Texas that the chain converted from Hardee’s to Carl’s.
“It’s a new and distant market that is going to take some time to seed and develop,” he said.
At company-operated Hardee’s restaurants, same-store sales were down 4.8%, CKE said.
CKE plans to convert its entire Hardee’s system of more than 2,800 restaurants to the new Star Hardee’s concept by the end of fiscal 2002.
Thompson said the company is converting Hardee’s to Star Hardee’s at a rate of 8 to 10 restaurants per week. So far, 300 restaurants have been converted.
He said that in addition to new decor, some items such as hot dogs and fried chicken are being dropped from the Hardee’s menu, while three types of charbroiled burgers similar to those at Carl’s Jr. are being added.
“For the last three quarters we’ve been saying it’s going to turn around here or there,” Thompson said. “Today, we’re just saying it’s going to turn when it’s going to turn.”
Analyst William H. Moore said the Hardee’s results are disappointing.
“Really, they bet the farm on Hardee’s, and it was supposed to have been an 18-month process,” said Moore, with Forum Capital in Greenwich, Conn.
“The light at the end of the tunnel, people were expecting to see it by now. But if you dig deep, you can see the turnaround is taking place. There’s just road bumps along the way.”
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Bloomberg News Service contributed to this story.
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More Trouble at Carl’s
After initial investor optimism about its Hardee’s acquisitions, Carl’s Jr. parent CKE Restaurants has been outperformed by other restaurant stocks. Here’s how $100 invested in CKE and $100 invested in the Standard & Poor’s Restaurant Index has fared during the past two years.
1997
Sept. 10: CKE second-quarter profits hit record.
1998
Jan. 15: Announces acquisition of 557 more Hardee’s.
March 17: Fourth-quarter profits more than double.
June 15: First-quarter sales and profits double.
Late October: Hurricanes in Southeast slow Hardee’s sales.
Nov. 30: Merrill Lynch raises rating to “accumulate.”
1999
March 18: CKE warns Hardee’s same-store sales will decline again.
Source: Bloomberg News
