Monster Burger Scares Up Success

CKE Restaurants (NYSE: CKR  ) isn't a leader, but it's working hard for your business. Two CKE franchises rank 10th and 11th in sales, respectively: the 1,014-location Carl's Jr., and the 2,034-location Hardee's quick-service hamburger chain.

CKE decided that being just another quick-service hamburger joint was not where its future was. Standing out by creating a premium-priced Monster Thickburger late last year at Hardee's has really paid off. And for 20 consecutive sales periods (that's a little over 18 months), the company has reported rising same-store sales.

Today, the company reported its first annual profit since fiscal 1999 (the company just finished fiscal 2005). Net income came in at $18 million, up from a loss of $53.2 million last year, which included a $34.1 million charge against goodwill.

Before analyzing CKE's results, consider that the company operates 33% of its Hardee's restaurants and 42.2% of the Carl's Jr. stores. Compare that to 29.2% at McDonald's (NYSE: MCD  ) and 22.3% at Wendy's (NYSE: WEN  ) . CKE is exposed to more operating risk than its competitors are.

The best news, then, was that company-owned restaurant-level margins increased, compared with fiscal year 2004, by 0.9% to 21.1% at Carl's Jr. and by a strong 5% to 14.3% at Hardee's.

That operating risk translates into a high debt-to-equity (D/E) ratio. While McDonald's and Wendy's hover around 65%, CKE has a ratio almost four times that.

The company's ability to expand its margins is probably why Wall Street has priced the stock at 22 times estimated earnings for this fiscal year. Comparably, stock in Wendy's prices at 19 times earnings and McDonald's at 15.6 times.

CKE surprised this observer by not squirreling away the greenbacks it earned. Instead, the company announced a $0.04-a-quarter dividend. That will reward shareholders (a good move), but it does not save cash for a rainy day.

One dark cloud may be that company-owned same-store sales were 7.7% and 7.0% at Carl's Jr. and Hardee's, respectively, for the just completed fiscal year -- but fourth-quarter same-store sales were up only 4.9% and 4.4%.

The good news for CKE is that it has established itself in the premium-priced niche, is expanding its offerings in that niche, and has finally improved its margins so that it turns an annual profit. The stock reflects the success -- it's up 35.5% over the past 52 weeks, while McDonald's and Wendy's are sporting only 10.8% and 8.9% stock market gains, respectively.

Fool contributor W.D. Crotty owns stock in McDonald's -- and will be stopping there, and not at Hardee's, for lunch. Clickhereto see The Motley Fool's disclosure policy.

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