TALES OF THE TAPE:CKE Sales Could Sizzle As Economy Rebounds
19 June 2009 - 4:30AM
Dow Jones News
CKE Restaurants Inc. (CKR), owner of the Hardee's and Carl's Jr.
hamburger chains, hopes that its stubborn refusal to wade into the
fast-food value wars will help sales sizzle in an economic
rebound.
For the time being, CKE, known for gut-busting burgers popular
with young men, is suffering some heartburn. Same-store sales for
the two brands fell 1.8% in the first quarter, weaker than analysts
would have liked, with Carl's Jr. weighing down results. CKE says
that competitors' deep discounts are undercutting its premium
offerings, like Hardee's "Six Dollar Thickburgers" - so-named for
their perceived cost at a full-service restaurant - for $3.99.
The plus side was that CKE was able to hold margins flat from
year-ago levels, as the company prospered from lower food and labor
costs.
Sales trends are keeping some analysts from getting bullish on
CKE shares, which are flat this year, but Feltl & Co. on
Thursday initiated coverage on CKE with a "buy" rating, liking
CKE's potential for sales recovery in an economic rebound.
In recent trading, shares were at $8.68, having receded back to
what they traded at before the company announced preliminary
first-quarter results in late May. Analysts will be looking for
more clarity on sales and sustainability of cost controls when CKE
reports first-quarter earnings next week.
The company may be ready to crack its premium plan, if ever so
slightly, as it's taking steps to draw attention to some of its
lower-priced products.
Chief Executive Andrew Puzder says CKE has added a combo meal
centered around its value options, using a small drink and fries to
get customers to build their bill. The company is also testing
replacing its 20-ounce soda with a 16-ounce drink for 99 cents,
hoping to entice customers who are foregoing drinks to buy the
high-margin items.
Still, CKE isn't about to have Padma Lakshmi or Paris Hilton,
celebrities who have been featured in provocative Carl's Jr. ads,
hawking 99-cent burgers anytime soon. The company doesn't want
consumers to get used to discounts or come to expect food at a low
price.
"You lock yourself into a price point and it's a death knell,"
Puzder said in a recent interview.
That's problematic as costs rise, which analysts are seeing for
2010. If customers become set on a certain price, restaurants would
have to either change their dish or face lower profits.
"If you assume we're going to have inflation, and you've trained
your customer that you have a 99-cent menu, what are you going to
serve them? A bun?" said Puzder.
Economists are beginning to think the recession will end this
quarter, and while growth will remain slow-going, Carl's Jr. and
Hardee's hope customers will beef up their orders with sides and
drinks, as well as splurge for indulgent burgers. Another key is
seeing signs of stability in California, where the unemployment
rate is doing a number of Carl's Jr.'s sales.
"When things do get better, especially in California, I do see
major gains for them," said Conrad Lyon, analyst at Global Hunter
Securities LLC, who has a "hold" rating on the stock.
CKE is also pushing along with plans to expand. It recently
signed a franchising deal to open nearly 200 Carl's Jr.'s stores in
Texas and is planning to add more Hardee's locations to existing
markets. CKE will also target Florida for new stores, hoping better
winter weather there will offset weakness in some Midwest
states.
CKE also sees room to expand internationally and is looking for
a greater stake in doing so. Puzder said the company is in early
talks for joint ventures on international development rather than
arranging them as licensing agreements.
"They have an under-appreciated international growth story that
will come into more focus over the next several years," as
international operations grow, Credit Suisse's Keith Siegner
said.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194;
paul.ziobro@dowjones.com