Feeding on High-Priced Burgers

Premium-priced CKE Restaurants (NYSE: CKR  ) , operator of the Hardee's, Carl's Jr., and La Salsa fast-food joints, is trying to make my caution in September unwarranted. The company is starting to turn premium-priced products into better (but not yet premium) operating margins.

Today's third-quarter earnings report -- a commendably detailed and forthright production -- showed that revenue increased 4.2% and net income by 14 times relative to the year-ago quarter (the earnings increase was helped by the previous quarter's income being less than $1 million). Same-store sales, a key statistic, increased for the sixth consecutive quarter.

Operating margins for the quarter increased to 5.4% from 3.4% -- a healthy sign. But those margins are half those at Wendy's (NYSE: WEN  ) and a third of those at McDonald's (NYSE: MCD  ) . For a company selling a $5.49 burger (composed of two one-third-pound patties, four pieces of bacon, and American cheese on a sesame seed bun), you would expect better margins.

The company is staking out a niche built on premium products with premium service. While the premium service has yet to reach my local Hardee's, the product is certainly unique for a national fast-food chain. But unique products can be found at fast-growing Sonic (Nasdaq: SONC  ) , and its operating margins even top those at McDonald's.

The competitive landscape is changing, too. Yum! Brands (NYSE: YUM  ) is having success combining two or three of its concepts under one roof. When you own KFC, Pizza Hut, Taco Bell, Long John Silver's, and A&W All American Food, you have enough variety to appease every appetite in the family SUV.

Wall Street loves today's earnings news, which beat analyst expectations. CKE was up 13% at today's high -- and up almost 100% from where it was 52 weeks ago. But, with sales growth at levels far less than that of many competitors, premium-priced fast food has yet to turn into a feeding frenzy. CKE needs to keep improving operating margins if it wants to justify its stock price, which is 17 times fiscal 2005 estimated earnings.

For related food for thought, see:

Fool contributor W.D. Crotty owns stock in Yum! Brands and McDonald's -- and is active onThe Motley Fool discussion boards -- where you can discuss topics such as fine dining or individual stocks such as CKE Restaurants. The Motley Fool is investors talking to investors.


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