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.
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Fool contributor W.D. Crotty owns stock in Yum! Brands and McDonald's -- and is active on The 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.
