Sure, CKE Restaurants (NYSE:CKR) makes a mean burger, but its latest quarterly results may have us reaching for an antacid on our way out the door.
Despite same-store sales increases of 2%-3% at its Carl's Jr. and Hardee's chains, the company's operating income dropped by an artery-clogging 31% to $23.4 million. What was the problem? Higher food and packaging costs were partly to blame -- they accounted for about one-third of the operating-income decline. In addition, restaurants across the industry are dealing with higher commodity prices for items such as beef, cheese, and pork, as well as higher oil prices.
But there has to be more to create this big a problem for CKE. And there is.
The company endured higher costs for rent, depreciation, labor, share-based compensation, and advertising -- costs it will generally be stuck with on an ongoing basis. And in my book, depreciation counts as an expense -- it is merely a process of allocating expenditures into different periods, rather than taking them all at once.
To be fair, there were higher jumps in one-time items such as workers' compensation, as well as a decrease in royalty income. But the other items I mentioned accounted for the bulk of the operating-income decline.
CKE is in the midst of a restructuring effort. It is refranchising restaurants, remodeling, and adding new products to its menu, such as new burgers and ice-cream shakes. These results, however, show that the company has a long road to travel.
A year ago, investors might've been bailed out by a sale to a private-equity company. But with the credit markets in a state of flux, that doesn't seem likely now. For me, I'd stick with the allure of the Golden Arches and choose McDonald's (NYSE:MCD), which continues to perform well. For those looking for a story that's improving, you might try wearing the crown at Burger King (NYSE:BKC), although it remains to be seen whether BK's improvement can continue now that it's adding restaurants at a faster clip. Either way, CKE just doesn't measure up right now.
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