You've got to like a company that talks about "meat as a condiment" Pastrami Burgers in their earnings calls. It almost makes me want to ask for 1,000 shares of CKE Restaurants
But despite the good numbers CKE posted across the board, the stock market seems to think that the company "missed" its third-quarter earnings target because of an unusually high tax rate. That's kind of like missing your plane because its wings fell off on the tarmac. Technically, you missed, but it hardly makes you chronically unpunctual. Let's take a look.
The company, which owns and franchises 1,079 Carl's Jr., 1,923 Hardee's, and 95 La Salsa restaurants, reported that earnings dropped nearly 40% to $9.5 million. However, taxes this quarter were $10 million compared to $0.5 million last year, mainly because CKE's successful turnaround has placed it solidly in the black, which means it has to start paying Uncle Sam.
On almost every other metric, CKE had a very successful quarter. Sales increased 6% year over year, with Carl's Jr and Hardee's same-stores sales increasing 6.2% and 5.6%. The Hardee's number is less impressive than it looks, because last year Hurricane Katrina hurt sales, making this year's comparisons easier.
Operating income increased 16%, and operating margin increased 50 basis points for the quarter, thanks to lower commodity costs and leveraging of operating expenses, especially labor costs. Carl's Jr.'s average volumes hit a record high at $1.4 million per unit, and Hardee's $911,000 average unit volume hit a decade high at the end of the quarter. CKE also continued to strengthen its balance sheet by paying off $28.7 million in debt.
That's no miss!
The tax rate was unusually high because CKE didn't recognize certain non-recurring tax benefits, which were related to payments used to induce convertible bondholders to convert their bonds to stock. Also, the unusually high tax rate does not reflect cash outflows; the company's cash tax rate remains at around 2%, until it uses up tax credits from previous losses. In other words, I think investors should ignore this particular earnings "miss."
I like CKE's aggressive eye for the bottom line and its feisty nature. During the conference call, an analyst expressed concerns that competitors McDonald's
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above, and he appreciates comments, concerns, and complaints.