CKE Restaurants, Inc. (NYSE: CKR)
announces results for the 12- and 28-weeks ended August 13, 2001.
Results for CKE’s second quarter of fiscal 2002, the last fiscal quarter (first quarter fiscal 2002, referred to as the link quarter) and the
second quarter of the prior fiscal year, as well as the year-to-date results, are summarized below. Pro-forma amounts are shown after
applicable income taxes as if the company (1) had not recorded a loss from the repositioning activities and (2) was able to record a
deferred tax asset in fiscal year 2002 as it had been able to in the prior fiscal year.
“We are extremely pleased to report that our Hardee’s restaurants reported positive same-store sales for the second quarter,” said
chief executive officer Andrew F. Puzder. “This is the first time that has occurred in many years. As indicated in our last press release,
we believed that we were turning the corner and this quarter’s same-store sales results at Hardee’s now corroborate that statement.
“Hardee’s same-store sales were up 1.0% in the current quarter versus a decline of 4.2% in the link quarter and a decline of 8.4%
during the second quarter of last year. We attribute this success to 1) our operations improvement program at Hardee’s emphasizing
quality, service and cleanliness, (2) eliminating unprofitable stores, (3) a deliberate increase in labor in the restaurants to enhance
service to our guests, (4) improved marketing, (5) continuing to install charbroilers (now in 43% of the company-operated system) and
(6) continuing to remodel restaurants (40% of the company-operated system is now remodeled with nine DMA’s which are 100%
charbroiler).
“We also introduced an exciting new product at Carl’s Jr. during the last period of the quarter, the Six-Dollar Burger, which contributed
to Carl’s Jr.’s positive same-store sales of 2.3% versus 0.7% in the link quarter. This burger, which is comparable to a product that you
may get at casual dining restaurants, is priced at just $3.95. We are extremely pleased with the results of this sandwich to date.
“During the quarter, the sale of additional properties, which included the sale of 23 profitably operating Carl’s Jr. stores as well as
cash flows from operations, enabled us to reduce our indebtedness under our credit facility to $19.5 million as of the end of the
quarter. It has been further reduced to $0 as of yesterday. Excluding the $10.1 million tax refund we received this quarter, cash flow
from operations for the quarter in the statement of cash flows would be $29.4 million versus $12.6 million for the link quarter and a
cash outflow of $12.5 million for the prior year comparable quarter. We are continuing with our plan to refinance the credit facility and
intend to have this refinancing completed by the end of fiscal 2002.
“As we stated in our last quarter’s release, we completed our assessment of stores for closure and, accordingly, we do not expect to
incur additional material store closure charges during the next 12 months. We closed 64 Hardee’s and four Carl’s Jr. restaurants
during the second quarter of fiscal 2002 and now have only 22 additional restaurants planned for future closure. As shown in Table 2
below, our results, exclusive of the operating results of the stores we have sold or closed or which we will close, reflect a slightly
smaller loss for this quarter.
“Although same-store-sales at both concepts increased, the pro-forma results were a loss. The pro-forma results are a loss
because we encountered adverse experience in several areas-(1) workers’ compensation claims and (2) Hardee’s franchisee bad
debts (3) rising beef costs and (4) increased advertising expenditures at Carl’s Jr. We increased our reserves for workers’
compensation and bad debts and we believe that we are adequately reserved for these risks.
“Our management team is now looking past this repositioning year and focusing on long-term strategic planning. It is clear that we
need to leverage our strengths to reach our full potential, which include building new restaurants for both brands, continuing our
remodel program at Hardee’s and developing new exciting products, like the Six-Dollar Burger. We have developed momentum in
sales. We are making significant strides in the right direction and we are committed to improving shareholder value. It is too early in
the strategic planning process to set earnings guidance for fiscal 2003 and beyond, however, our strategic direction is taking shape
and I remain confident that we are focused on the things that matter,” Puzder said.
Factors Effecting Comparability of Quarterly Results
Although the current quarter’s same-store-sales increased over the link quarter, the pro-forma current quarter results are a loss of the
same magnitude as the link quarter. This circumstance is a result of several factors, including the Company recording during the
current quarter the following increases in reserve accounts over the corresponding amounts recorded in the link and prior year
quarters:
The increase in the workers compensation reserve was recorded based upon an independent actuarial review as of the end of the
quarter. The increase is principally related to continuing adverse experience for the prior accident year (fiscal 2001). Workers
compensation claim losses rose in that accident year primarily due to the increased frequency and severity of claims, as well an
overall increase in healthcare costs. Claims experience for the current accident year has to-date been less than the prior year, as a
result of both a decrease in frequency and severity compared to the prior accident year.
The company observed that certain Hardee’s franchisees were experiencing financial difficulties and some increase in the number of
franchisees with past-due balances. As a result of these circumstances, the company increased Hardee’s allowance for doubtful
accounts from an amount representing 38% of gross notes and accounts receivable at the beginning of the year to 54% at the end of
the second quarter.
In comparing the second quarter 2002 to the link quarter, it is important to note that the first quarter 2002 has sixteen weeks and the
second quarter has twelve weeks.
Other factors effecting comparability of quarterly results are discussed below by concept.
Carl’s Jr. Concept
• During the second quarter 2002, Carl’s Jr. debuted the Six-Dollar
Burger.
• During the second quarter 2002, the Company sold 23 restaurants to
franchisees and closed four restaurants. Carl’s Jr. franchisees and
licensees opened four restaurants, acquired 23 from the Company and
closed one. Table 1 reconciles the activity in restaurant count for
the quarter.
• For the 12-week period ended August 13, 2001, Carl’s Jr. company-
operated restaurant revenue decreased 17% from the prior year
comparable period. The decrease in Carl’s Jr. revenue is primarily
due to the sale of company-operated stores to franchisees as well as
the closure of company-operated stores. While revenues from company-
operated stores are down, franchising income has more than doubled,
also due to the increase in the number of franchisee-operated
restaurants.
Company operated restaurant margins for Carl’s Jr. for the second quarter 2002, second quarter 2001 and the link quarter were
17.4%, 20.7% and 20.0%, respectively. The decline in margins at Carl’s Jr. from the second quarter 2002 versus the second quarter
2001 is due primarily to the increase in the workers’ compensation reserve discussed above, as well as rising beef costs. Although
the food and paper costs as a percentage of restaurants revenue is comparable to the prior year period, last year Carl’s Jr. was
engaged in discounting activities (i.e. the 99c Spicy Chicken Sandwich) which increased food and paper costs as a percentage of
sales. In the current period, there was less emphasis on discounting, however there were rising beef costs. This is why, although
same store sales are up, the overall margin at Carl’s Jr. declined. Additionally the conscious decision to increase advertising
expenditures at Carl’s Jr. reduced that concept’s overall profit contribution.
For the 28-week period ended August 13, 2001, Carl’s Jr. company-operated restaurant revenue decreased 16% from the prior year
comparable period. The decrease in Carl’s Jr. revenues is primarily due to the sale of company- operated stores to franchisees as
well as the closure of company-operated stores. While revenues from company-operated stores are down, franchising income has
more than doubled, as described above.
Company operated restaurant margins for Carl’s Jr. for the second quarter year-to-date 2002 and second quarter year-to-date 2001
were 18.9% and 21.3%, respectively. The decline in margins at Carl’s Jr. is due primarily to the workers’ compensation expense
discussed above as well as an increase in the cost of natural gas at the restaurants during the first quarter of the year, which have
since declined.
Hardee’s Concept
• During the second quarter 2002, Hardee’s introduced a three-item line
of Supreme Sandwiches served on a multi-grain roll — the Smoked
Turkey Club Supreme, the Roast Beef Supreme and the Hot Ham ‘N’ Cheese
Supreme. Additionally, Hardee’s began offering a Bacon Cheddar Omelet
Biscuit under the “2-for-2” menu whereby guests could purchase two
biscuit sandwiches for just two dollars. A premium introduced during
the quarter was a free California Raisin figure included with the
purchase of Hardee’s Cinnamon Raisin Biscuits.
• During the second quarter 2002, the Company sold 13 restaurants to
franchisees and closed 64 restaurants. Hardee’s franchisees and
licensees opened two restaurants and closed 13. During the quarter,
Hardee’s added 26 charbroilers and remodeled 11 restaurants to the
Star Hardee’s format. The Hardee’s franchisees remodeled 12 Hardee’s
restaurants to the Star Hardee’s format. Table 1 reconciles the
activity in restaurant count for the quarter.
• For the 12-week period ended August 13, 2001, Hardee’s company-
operated revenue decreased 31% from the prior year comparable period.
The decrease in Hardee’s revenue is primarily due to the sale of
company-operated restaurants to franchisees as well as the closure of
company-operated restaurants.
• Company operated restaurant margins for Hardee’s for the second quarter 2002, second quarter 2001 and the link quarter were
10.0%, 7.4% and 8.6%, respectively. The increase in margins at the Hardee’s restaurants in the second quarter 2002 versus the
comparable prior year period was primarily due to an increased scrutiny on discretionary expenses at the restaurants during the
current quarter, the company increased slightly its restaurant maintenance expenditures as compared to the link quarter. Hardee’s
has experienced the same increase in beef costs that Carl’s Jr. has, however Hardee’s sells less beef products.
Franchising income is down due to a reduction in initial franchise fees in the current quarter, reduced revenue from Hardee’s
Equipment Division as franchisees have spent less money on remodels in the current year than the prior year and increases to the
allowance for doubtful accounts.
For the 28-week period ended August 13, 2001, Hardee’s company-operated revenue decreased 33% from the prior year comparable
period. The decrease in Hardee’s revenue is primarily due to the sale of company-operated restaurants to franchisees as well as the
closure of company-operated restaurants.
Company operated restaurant margins for Hardee’s for the second quarter year-to-date 2002 and second quarter year-to-date 2001
were 9.2% and 9.6%, respectively. Margins at the Hardee’s restaurants for the 28-week period are down slightly from the prior year
due mainly to an increase in workers’ compensation costs, but to lesser extent than at Carl’s Jr., offset by the decrease in
discretionary spending discussed above. Franchising income is down for the same reasons as noted for the current quarter above.
Repositioning Activities
• During the second quarter of fiscal 2002, the Company recorded
repositioning charges of $31.7 million. These charges, which were
primarily non-cash in nature, consisted of net facility action charges
of $30.5 million, $1.0 million relating to severance payments for a
reduction in force and $258,000 reflecting the write-off of deferred
loan costs as a result of a reduction in borrowing capacity resulting
from the asset sale program during the quarter. The net facility
action charges of $30.5 million consisted of (a) an impairment charge
of $9.1 million for restaurants that the company plans to continue to
operate, but for which the net book value is not supported by current
estimated future cash flows, (b) an impairment charge and store
closure expense of $32.3 million, for 60 Hardee’s and four Carl’s Jr.
restaurants that the Company has closed or plans to close, consisting
of asset impairments of $21.1 million, $5.7 million goodwill
impairment and $5.5 for additional store closure expense reserves,
(c) net gains on restaurants sold to franchisees during the quarter of
$5.7 million and (d) a net credit of $5.2 million related to asset
impairment charges and store closure expenses for stores previously
identified for closure, principally representing the reversal of lease
reserves on restaurants that the company decided not to close. During
the second quarter of fiscal 2001, the Company recorded facility
action charges of $17.9 million relating to net losses on the sale of
certain Carl’s Jr. and Hardee’s restaurants.
For the 28-week period, the Company recorded repositioning charges of
$63.8 million which consisted (a) net facility action charges of
$58.7 million (b) a charge of $4.1 million recorded as interest
expense reflecting the write-off of deferred loan costs primarily as a
result of the modification of the Company’s senior credit facility and
(c) $1.0 million relating to severance payments. For the prior-year
28-week period, the Company’s repositioning charges were
$17.0 million.
• The asset sales arising from the repositioning activities have
resulted, and will continue to result, in a decline in restaurant
revenue and costs simply because the Company operates fewer stores.
In addition, the sale of the Taco Bueno brand has, and will continue
to result in less operating income than reported in prior periods.
Taco Bueno’s income before taxes was $1.1 million in the current
quarter and $1.7 million in the link quarter. As a result of these
circumstances, the Company has reduced costs, principally general and
administrative expenses, which reflects a reduction in headcount as
well as other expenses.
• Included in interest expense for the quarter is a charge of
$258,000 relating to a reduction in borrowing capacity on the
Company’s senior credit facility this quarter. For the 28-week
period, the amount that related to charges of this nature is
$4.1 million. Exclusive of these charges, interest expense was
$12.2 million and $30.9 million for the 12-week and 28-week periods,
respectively and $16.6 million and $37.2 million in the 12-week and
28-week prior-year periods, respectively. The decreases are due to
the substantial decrease in outstanding borrowings arising from the
asset sale program.
• As discussed above, the Company has embarked on an asset sale program
designed to generate cash to reduce indebtedness under its senior
credit facility. During the second quarter, the Company made a net
repayment on its senior credit facility of approximately $100 million,
of which approximately $86 million was provided by cash proceeds from
asset sales ($66 million from the sale of Taco Bueno). The balance of
the repayment was generated from operations. The Company has further
reduced the balance on the senior credit facility to $0 as of
yesterday.
• During the first three quarters of fiscal 2001, the Company recorded a
deferred tax asset for the tax benefit of operating losses, which
served to reduce the net loss reflected in the Statement of
Operations. Commencing with the fourth quarter of last fiscal year,
the Company ceased to record a deferred tax asset because of the
Company’s recurring operating losses. As such, the current year
period’s Statement of Operations does not reflect a tax benefit from
the operating loss, as was the case in the prior fiscal year.
BUSINESS OUTLOOK
The following statements are based on current expectations for the remainder of the fiscal year. These statements are
forward-looking and actual results could differ materially.
The Company anticipates opening approximately five new Carl’s Jr.
restaurants during the remainder of fiscal 2002 and the Carl’s Jr.
franchisees anticipate opening approximately 15 new restaurants during
the remainder of the fiscal year.
• The Company anticipates opening two or three new Hardee’s restaurants
during the remainder of fiscal 2002 and the Hardee’s franchisees
anticipate opening approximately 15 new restaurants during the
remainder of the year.
• Capital expenditures are expected to be between $30 million and
$35 million for the remainder of fiscal 2002.
• Carl’s Jr. same-store sales growth is expected to be at least 2% for
the remainder of fiscal 2002. Carl’s Jr. restaurant-level margins are
expected to be in the range of approximately 19% to 20% for the
remainder of fiscal 2002.
• Hardee’s same store sales are expected to be flat for the remainder of
fiscal 2002. Hardee’s restaurant-level margins are expected to be
approximately 10% for the remainder of fiscal 2002.
• The Company does not expect to identify a material number of stores to
close after the end of the second quarter of fiscal 2002.
• The Company intends to complete a refinancing of its senior credit
facility by the end of fiscal 2002.
• The Company expects that its general and administrative expense for
the remainder of the year will continue to be less than the prior year
comparable amounts.
