CKE Restaurants: The Case of the Missing Interest Expense

| About: CKE Restaurants (CKR)

CKE Restaurants (CKR) reported earnings on Wednesday, Jun 25. Optically, it looked like the company performed well, meeting revenue estimates and exceeding EPS consensus (31c reported vs 27c consensus). However, a deeper look reveals this to be an illusion. Operating income was down YoY, and yet EPS was up 35%, which looks strange. The company attributed this to a lower share count from share buybacks. But still, this is not the full story…

First, the company recognized a lower tax rate than expected (36% rather than 41%), which contributed 3c of EPS. But what caught my eye was that interest expense was down in spite of debt being up a lot. (As I pointed out in my previous note ["CKE Restaurants Looks Overvalued"], the company is not generating any cash and has funded its share buybacks through increased debt.) The company recognized only $4.6Mn in interest expense, while a 7% interest rate applied on its $400Mn in debt for the 16 week period would amount to $8.6Mn. So why was the interest expense so low? The company didn’t say anything in its press release.

In previous quarters, the company has pointed out the charge it took for marking to market its interest rate swaps to explain the elevated level of interest expense. In my previous analysis, I had “pro-forma’d” this out as it is a non-cash expense. It looks like this quarter the company had a benefit, but decided to keep mum about it! That tells you something about management – shout out “one-time” charges, but try to hide equivalent benefits.

The interest expense benefit of $4Mn amounts to another 4c per share after-tax. So add it to the tax benefit, and you get adjusted or recurring EPS of 24c for the quarter, missing the consensus estimate of 27c.

Sometimes, headline numbers can be deceiving.

Disclosure: Author has a short position in CKR