CKE Restaurants: On a Roll in Tough Economic Environment

CKE Restaurants (CKR) did it again, they blew away analyst expectations, despite the reality of a harsh economic environment. The burger chain reported dazzling second quarter earnings of .23 on revenues of $353 million, representing a 28% increase to second quarter, 2007 earnings of 18 cents.

Beating estimates handily: The Street was expecting earnings of .20 and revenues of $354 million, and although CKR's revenues were in line with estimates, the fast food purveyor was still able to beat on the bottom line by more than 15%.

Analysis of the quarter: CKR was effective at keeping its costs in check ,as its  operating costs as a percentage of sales fell 80 basis points from 81.5% to 80.7%. Its interest expense plummeted 54% from $4.5 million to $2.4 million. The company's SG&A costs unfortunately, rose 40 basis points from 8.7% to 9.1%, and if it was just able to maintain its previous SG&A rate, it would have clearly "hit one out of the park", generating an additional 3 cents of earnings to .26 , resulting in a 44% improvement over 2007 results.

Share repurchase program: The company's outstanding shares dropped 17% from 65 million shares to 54 million. This reduction in shares had the single largest impact on the earnings improvement.

Store refranchising: A total of 224 company Hardee's units have been sold to franchisees since the program was announced, including 29 stores in the second quarter. The company now has 3100 stores within its system (about 1170 Carl's Jr's and 1917 Hardee's). Its Hardee's company owned units generate average annual revenues of $973,000 while its Carl's Jr units average $1.52 million. Hardee's is very close to finally eclipsing the long elusive $1 million threshold mark, and yesterday's same store sales results could have finally pushed it over the top. The company reported Hardee's sales for period 8 increased 1.1% despite the negative impact of Hurricanes Gustav and Hanna.

Bottom line: The shares lost over 11% due to yesterday's overall market meltdown, providing a nice buying opportunity. The earnings release could propel the shares to make up for that loss and then some.

Disclosure: Long

Comments

[Ranjit Thomas:]

Don't you think it was curious that they had a big drop in interest expense even though the debt level is up? The interest expense amounts to a 2% interest rate on their outstanding debt, which is abnormally low. The explanation can be found in their 10Q. The co. recognized a non-cash gain on interest rate swaps of $2Mn this quarter, which contributed all of the "beat". They had a similar situation last quarter too. In the past, when this item was a loss, the co. was quick to point it out. Now when it's a gain, they quietly sneak it in, and gullible investors lap it up.

2008 Sep 18 08:43 AM

[Ranjit Thomas:]

Don't you think it was curious that they had a big drop in interest expense even though the debt level is up? The interest expense amounts to a 2% interest rate on their outstanding debt, which is abnormally low. The explanation can be found in their 10Q. The co. recognized a non-cash gain on interest rate swaps of $2Mn this quarter, which contributed all of the "beat". They had a similar situation last quarter too. In the past, when this item was a loss, the co. was quick to point it out. Now when it's a gain, they quietly sneak it in, and gullible investors lap it up.

2008 Sep 18 08:43 AM