Industry News | March 22, 2000

CKE Announces Consolidation, 3Q Estimates

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CKE Restaurants, Inc. (NYSE: CKR; "CKE") announced November 11, 1999 that it will consolidate the majority of the corporate functions of its subsidiary Hardee's Food Systems, Inc. within CKE's corporate headquarters in Anaheim, creating a single support and administrative center for the company's Carl's Jr., Hardee's and Taco Bueno restaurants.

Over the next eight months, the changes will result in the layoffs of approximately 150 corporate employees from Hardee's headquarters in Rocky Mount, N.C. Approximately 150 employees, including those with Hardee's Equipment Division, will remain at what will become the Hardee's division office in Rocky Mount. Certain corporate employees from Hardee's will be given the opportunity to transfer to Anaheim.

"Laying off good employees is never easy," said Tom Thompson, CKE's president and chief operating officer. "This is an unfortunate but necessary step toward making Hardee's healthy again. For two years we have worked hard to keep Hardee's corporate location, culture and structure intact, searching for the best way to run the business. We now believe that by consolidating functions under one roof we can operate more efficiently and effectively.

"When we acquired Hardee's in July 1997, we did not have an infrastructure that would have allowed us to move corporate functions to Anaheim. Now that improved technological systems are in place, we no longer need to support two parallel systems, 3,000 miles apart.

"This difficult decision was accelerated by two recent events. Following Hurricane Floyd, we were faced with what would be a costly reinvestment in our flood-damaged buildings if we were to leave Hardee's corporate functions in Rocky Mount. In addition, we recently announced a plan to sell some Company restaurants to franchisees, which ultimately will leave us with significantly fewer Company restaurants to support.

"When you consider our planned divestiture of Company restaurants and the significant flood damage sustained at our corporate offices, consolidation just makes sense," Thompson explained. Plans are to refurbish the main six-story structure on Hardee's campus, which will house the remaining Hardee's division office employees. Employees were notified today that the layoffs are planned in three phases, with the first phase in mid-January 2000, and the final phase anticipated to be complete in June 2000.

There is a retention pay program for employees affected by the consolidation who stay until the layoff process is complete. The program is based on a formula that recognizes years of service and the employee's position. Additionally, CKE has retained an outplacement firm that will be on site in Rocky Mount to assist employees. The company also announced today that it expects third quarter earnings to be in the range of $0.05 to $0.08 per share. The significant reduction in earnings compared to the second quarter is primarily attributed to the delayed recovery at Hardee's as well as normal seasonal trends.

"We continue to be encouraged by the results at the remodeled 'Star' Hardee's restaurants. However, there are not enough Star Hardee's remodeled yet to improve sales systemwide," Thompson said. Unfortunately, a number of factors together had a negative effect on earnings for the quarter.

Continued same-store sales decline at Hardee's and Carl's Jr. had a negative impact on restaurant-level operating margins. Hurricane Floyd also affected Hardee's revenues and operating margins with flood damage and closures at several restaurants.

The company also continues to incur costs related to new software implementation, coupled with increased Y2K compliance costs. Additionally, the company's acceleration of the Star Hardee's remodel program also accelerated depreciation and amortization expenses. Same-store sales at Hardee's for the third quarter are about the same as the second quarter, excluding the short-term impact of the hurricanes.

The Hardee's restaurants that were purchased from Imasco in July 1997—those CKE has had the most time to improve and have been remodeled to the Star Hardee's format—are comping positive. Sales at Carl's Jr. have improved over the second quarter of the year, responding positively to the new products introduced during the quarter. Taco Bueno continues to perform strongly, and will post its 18th consecutive quarter of same-store sales growth.

The company expects to release third quarter results by mid-December. The company remains encouraged with the progress made in selling company restaurants to franchisees. Multiple transactions are proceeding to definitive agreements, and the company expects to receive approximately $50 million in net proceeds from the sale of restaurants to franchisees during the fourth quarter. Receipt of these proceeds will allow the company to begin making significant principal reduction in existing debt levels and reduce interest expense on a go-forward basis.

CKE, through its subsidiaries, franchisees and licensees, operates more than 3,800 quick-service restaurants, including 896 Carl's Jr. restaurants in 13 Western states and Mexico; 2,787 Hardee's restaurants in 34 states and 10 countries; and 115 Taco Bueno restaurants in Texas and Oklahoma.