Has CKE Restaurants Inc. finally made it over the hump?
Company insiders are betting it has. In recent weeks, William Foley, CKE’s chairman, Chief Executive Andrew Puzder and company founder and chairman emeritus Carl Karcher have stepped up their buying of CKE shares.
“I personally felt that the stock price was at a level that had a potential to appreciate significantly over the next few years,” Foley said. “I’m trying to get my buying done over the next period of time. So a year or two from now, when I decide I want to take some profits, I can.”
Last week, CKE shares were trading at about 8, up nearly 200% from where they started the year. The company counted a market value of more than $400 million last week.
A year ago, the Anaheim-based operator of Carl’s Jr. and Hardee’s fast food chains still was wrestling with debt,then about $220 million.
Puzder, the former president of Hardee’s Food Systems Inc., took the helm of CKE a year ago and has worked to turn around Hardee’s, which had been draining CKE of profits since it was acquired about four years ago.
Fast forward to this fall and CKE is reporting no long-term debt, primarily from selling its Taco Bueno brand and hundreds of company-owned Carl’s Jr. and Hardee’s stores to franchisees. Some unprofitable stores were closed.
In August, Hardee’s even showed a same-store sales increase,albeit 1%,for the first time in years.
The moves have gone over well on Wall Street, where CKE’s stock has been on an upswing for most of this year.
“It’s encouraging. We’ve got to get up to 15 or 20,” Karcher said.
Last week, CKE showed it had gotten its appetite back for buying. The company said it intends to buy the Santa Barbara Restaurant Group Inc., which includes the Green Burrito and La Salsa chains, for about $60 million in stock.
The two companies have been connected for years. Foley also is chairman of Santa Barbara Restaurant, and Puzder sits on Santa Barbara’s board. He formerly served as the company’s chief executive and president.
CKE, as Green Burrito’s largest franchisee, runs 107 dual Carl’s Jr.-Green Burrito stores.
This acquisition stands to relieve CKE from royalty and development obligations to Green Burrito, Puzder said. Plus, it gives CKE control of the popular La Salsa casual Mexican chain, which CKE intends to grow.
There are 80 La Salsa restaurants, half company-owned and half franchised. Puzder said CKE would like to add 50 to 80 restaurants in Los Angeles, San Diego and Orange County, and eventually franchise the concept nationwide.
But Puzder doesn’t foresee another replay of the Hardee’s debacle.
“With Hardee’s it was like the little fish eating the big fish,” he said. “We bought a brand that was much bigger than we are and we had a much more difficult time integrating that brand into our culture. This is a much smaller acquisition. It’s something we’re very familiar with.”
CKE plans to keep its operations management team separate from La Salsa, Puzder said.
“I need the people operating Hardee’s and Carl’s to stay focused,” he said.
Tony Brenner, an analyst with Newport Beach-based Roth Capital Partners LLC, said CKE seems to have turned a corner,eliminating debt that had been “hamstringing” the company for years and improving sales at Hardee’s.
“The number of stores they were operating at Hardee’s was way too cumbersome for this company,” Brenner said. “Reducing the proportion of stores that CKE itself operates will enable them to do a better job.”
About a third of the 2,492 Hardee’s stores now are company-owned with the rest franchised. Carl’s Jr. locations (now at 968) are evenly split between CKE and franchisees.
Still, CKE has work to do.
For the 12 weeks ended Aug. 13, CKE’s revenue was $340.7 million, down from $438.5 million a year earlier. The company reported a pro-forma loss,before restructuring charges and after factoring in a tax issue,of $2.4 million for the period, down from $2.9 million a year ago.
“That the biggest challenge facing us,getting the company passed that operating loss mark,” Puzder said. To get there, Foley said CKE needs reduce its general and administrative expenses. He said the chain currently runs at about 8% of sales and should move closer to 6%, “if we’re really going to be efficient.”
“If we did that the company would be profitable,” said Foley, who’s also chief executive of Irvine-based Fidelity National Financial Inc. “It is a process and it takes time. I know Andy and the CFO Dennis Lacey are working on it everyday.”
Puzder and Foley have been buying CKE shares for months now, including as recently as August. So has Karcher.
CKE is set to releases its next quarterly report on Dec. 14. Analysts estimate a profit of 2 cents per share before charges, vs. an operating loss of 15 cents a year ago.
But CKE’s “not out of the woods yet” in respect to Hardee’s, according to analyst Brenner.
“They’ve got to demonstrate that they can grow the business,” he said.
Toward that end, CKE has refocused on the basics and will continue to do so, officials said. At both Carl’s and Hardee’s they said they are emphasizing good service, clean restaurants and good food.
“We have some real strengths to build on,” Puzder said.
Hardee’s also recently switched its advertising to Los Angeles-based Mendelsohn/Zien, which has handled Carl’s Jr. since 1995. The combined account is estimated at $80 million.
Hardee’s hopes the ad agency’s success with Carl’s may rub off. It has begun rolling out Carl’s “Six Dollar Burger” campaign into its stores.
“No one has been able to unlock the door of advertising success at Hardee’s in many years,” said Richard Zien, managing partner with Mendelsohn/Zien in a statement. “Inconsistent advertising strategies have resulted in a variety of messages, which may have served to confuse Hardee’s customer base. Based on our ongoing success with Carl’s Jr., we were asked to assist with the Hardee’s brand.” n
