Fool.com: CKE and Hardee's Still Star-Crossed (News) August 16, 1999

CKE and Hardee's Still Star-Crossed

By Brian Graney (TMF Panic)
August 16, 1999

The work-in-progress turnaround story for fast food restaurant chain Hardee's hit another snag today as owner and franchisor CKE Restaurants (NYSE: CKR) issued its fourth consecutive quarterly profit warning. Due to lower-than expected revenues and operating margins at Hardee's and its Carl's Jr. burger chain, CKE said it expects fiscal Q2 EPS to come in between $0.19 and $0.21, well shy of the First Call mean estimate of $0.33. Additionally, the company said its fiscal Q3 and Q4 results will resemble those of Q2 unless it can somehow jump-start sales.

Many investors on Wall Street and on Main Street, U.S.A. where Hardee's does business loved the initial concept behind the turnaround. Fresh on the heels of his revival of Carl's Jr., CKE CEO Bill Foley jumped headlong into rejuvenating the sleepy Hardee's chain in 1997. After succeeding in getting costs in line and initially boosting unit level margins, Foley and Co. turned their attention on Hardee's real black eye -- a seemingly endless stream of year-over-year same-store sales declines. Revitalization efforts and the remodeling of Hardee's stores under a new Star Hardee's plan were supposed to yield the first set of positive comps for the chain last quarter. Instead, same-store sales fell 4.8% in the period.

According to analysts, Hardee's comps are likely to fall by at least that much in the current quarter, possibly even more. Making matters worse, sales at Carl's Jr. are also slumping and are expected to fall in the mid-single digits area. Despite the popularity of Foley's turnaround plan with the Street, CKE's restaurants are losing popularity with consumers. Intense competition from the likes of McDonald's (NYSE: MCD), Wendy's (NYSE: WEN), and the Burger King unit of Diageo (NYSE: DEO) hasn't helped matters much.

Despite the succession of setbacks, CKE is pushing ahead with its remodeling plans for Hardee's. The company said its weekly remodeling rate has increased and projects that 400 company-operated Hardee's will get the Star treatment by the end of the fiscal year in January. To date, a total of 434 Hardee's have been transformed. But unfortunately, the Star Man marketing campaign that has accompanied the switcheroo since May and other promotional initiatives have failed to drive as much traffic to the facelifted stores as had been expected.

Meanwhile, the Hardee's transformation plan is sucking the cash flow lifeblood right out of CKE. Last quarter, the company's $43.2 million in operating cash flow failed to cover the $67.2 million spent on plant and equipment purchases during the period -- the second time that situation has occurred in the past five quarters. Meanwhile, the company's rising debt load led to interest expense of $15.7 million in Q1, which was 70% higher than in the first quarter of the prior year.

Without sales growth and a decent return on the money it has invested in Hardee's, CKE is looking at a bleak net cash outflow scenario for the foreseeable future. As fellow Fool Rick Munarriz pointed out when CKE ended up in Daily Trouble-land recently, Foley has made Hardee's a tighter operation but not a more popular one. Even at its reduced valuation, CKE will have to face facts and deal with its popularity problem at some point. Until that happens, investors may want to pass on this company's cooking.

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