<FOOLISH WORKSHOP>

CKE Revisited

by Louis Corrigan (TMF Seymor)

Atlanta, GA. (Dec. 15, 1998) -- Our margins screen this week turns up a familiar candidate -- CKE Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %>, which owns, operates, and franchises Carl's Jr. and the 2,883 Hardee's restaurants. I looked at this in the October 20 Workshop report because it puzzled me why this stock would have been one of the current picks in the Unemotional Growth portfolio given it had performed so badly and delivered weak Q2 results. It's no longer in the UG, but I thought it would be fun to check in on it again since CKE announced Q3 earnings last week.

The market had a hard time figuring out the quarter's results. First the stock fell on what looked like missed estimates, then the next day, after a conference call with analysts, it rose. It's now at $28 1/2, up from $23 1/16 when I last wrote about it. Not bad. Even discounting the market's rally, it's done well. Investors think CKE may be cheap if it can turn around its Hardee's chain, but let's look at the numbers.

Yikes!

For starters, revenues rose 32% to $457.6 million. Now, let's go to the diluted earnings. If we take the "before extraordinary items" line, we get $0.34 versus $0.27 last year. So EPS would be up 25.9%. Why then would CKR have made our margins screen? Dropping to the diluted earnings line including a "gain on early retirement of debt, net of applicable income taxes," we get EPS of $0.39 versus $0.27, or a gain of 44.4%. Okay, so which is it? Did margins rise or not?

On an initial take, I would say no. But let's turn to the text of the press release. "Net income, excluding the $4.5 million extraordinary gain on the early retirement of debt and one-time charges of $15.0 million relating to the write-down of the Company's investment in Boston West, LLC and the gain of $10.3 million from the Company's sale of its investment in Star Buffet, Inc., would have been $19.0 million, or $0.39 per share on a diluted basis."

No one said investing couldn't be dull. So it sounds like the $0.39 is legit and margins rose, though I'd want to listen to the conference call to make sure I'm understanding this right. Of course, CKE didn't post its conference call number, so... we'll have to go with what we've got for now. And the real question is, how's Hardee's doing?

For the quarter, Hardee's restaurant level operating margins (which I assume doesn't include administrative costs) hit 17.2%, up from 13.7% a year ago. That's great. Same-store sales (SSS), however, were down 7.2%. That's not great, but it's about what management had projected in October. Comp-store sales declined by 10.8% in Q1 and 9.7% in Q2. So the company's making some progress.

Management expects a smaller comp-store decline in Q4 with positive SSS in Q1 of the coming fiscal year. That is, two quarters out. Given the weak comparisons over the last year, the company's got a low hurdle to overcome. That's good for investors.

The game plan is to roll out remodeled Hardee's restaurants as "Star Hardee's," a format that focuses on charbroiled burgers and bright new colors for the decor. It's kinda Hardee's run through the Carl's Jr. concept. So far, there are 71 total remodeled restaurants in the Tri Cities area of Tennessee and Virginia, in St. Louis, and in Rocky Mount, North Carolina. Average sales at the new stores are up 10%. The company plans another 300 to 400 remodels next year with franchisees remodeling 100 to 200 stores.

All of that sounds interesting. Looking at the Fool Snapshot, though, you can see a company that still has a lot of debt. If I lived near any of the new locations, I'd be tempted to go get a burger and take a look. This is a turnaround story, and lots can go wrong with a turnaround story. But the latest results at least suggest the story is improving. For further research, I would want to take a closer look at what effect the move toward more company-owned stores has had on operating income. Also, I'd want to look closer at the company's financial structure to make sure they've got enough funds to do all this remodeling.

Another stock of note for this week is database and applications software maker Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>, which saw sales rise 27% and EPS jump 47%. That's atop an unexpectedly weak quarter a year ago, but Oracle at least seems to be more focused on results than it was then. And the new ads on CNBC are terrific.

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database