CKE Warns That Poor Sales Bite Into Earnings

In a warning that stunned Wall Street, CKE Restaurants Inc. said Wednesday that its earnings in its 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 close at $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 during the last three months.

The Carl’s Jr. projections “spooked the investor,” said Allan Hickock, analyst with U.S. Bancorp Piper Jaffray. He lowered his rating on CKE shares to “neutral” from “buy” Wednesday but 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 launching the steak sandwich in 1997, so-called 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.

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 later 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.

CKE said sales were hurt by the remodeling of some Hardee’s restaurants into Carl’s Jr. operations.

The company is also converting other Hardee’s restaurants to its Star Hardee’s concept. 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.

As for Hardee’s, Thompson said the company is converting Hardee’s to Star Hardee’s at a rate of eight to 10 restaurants per week. So far, 300 restaurants have been converted.

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Bloomberg News was used in compiling this report.