CKE Restaurants, Inc. F2Q09 (Qtr End 08/11/08) Earnings Call Transcript

CKE Restaurants, Inc. (CKR)

F2Q09 Earnings Call

September 18, 2008 9:00 am ET

Executives

John Beisler - Vice President, Investor Relations

Andrew F. Puzder - President, and Chief Executive Officer

Theodore Abajian - Chief Financial Officer and Executive Vice President

John J. Dunion - Executive Vice President, Supply Chain Management

Analysts

Christopher O'Cull - Suntrust Robinson Humphrey

Anton Brenner - Roth Capital Partners LLC

Rachael Rothman - Merrill Lynch

Keith Siegner - Credit Suisse

Conrad Lyon - Global Hunter Securities, LLC

Brian Moore - Wedbush Morgan Securities Inc.

Presentation

Operator

Welcome to the second quarter 2009 CKE Restaurants earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, John Beisler, Vice President of Investor Relations.

John Beisler

CKE Restaurants is holding this conference call to discuss our results for the 12 weeks ended August 11, 2008.

Yesterday CKE issued a pair of press releases announcing its financial results for the 12 weeks ended August 11, 2008 and same-store sales for the 4 weeks ended September 8, 2008. These releases are available on our website, www.CKR.com. CKE has also filed its Form 10-Q with the SEC. This call will reflect items discussed within these press releases and Form 10-Q. CKE management will make reference to them several times this morning.

Speaking on today's call are Andy Puzder, President and Chief Executive Officer, and Ted Abajian, Executive Vice President and Chief Financial Officer. Andy will begin today's presentation with a few comments regarding our second quarter results as well as our Period 8 same-store sales results. Ted will then review our second quarter results with you. Andy will conclude today's presentation with comments on the strategic direction of the company. Andy and Ted will then take questions from callers.

Before we begin I'd like to remind you of our disclosure regarding forward-looking statements contained in our Form 10Q and earnings release. Our disclosure regarding forward-looking statements can be found within our Form 10Q under Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. Matters discussed during our conference call today may include forward-looking statements related to future plans and developments, financial goals and operating performance, and are based on management's current beliefs and assumptions. Such statements are subject to risks and uncertainties and actual results may differ materially from those projected in the forward-looking statements.

I introduce you now to Andy Puzder, President and CEO.

Andrew F. Puzder

The second quarter of fiscal 2009 was a very successful quarter for CKE. Both our brands grew same-store sales and posted record average unit volumes. We reduced consolidated restaurant-level operating costs in a challenging environment and reported increases in both net income and diluted earnings per share.

Second quarter blended same-store sales increased 3.6%, our 11th consecutive quarter of positive blended same-store sales. On a twoyear cumulative basis, blended same-store sales have increased 6% for the second quarter. With respect to our individual brands, same-store sales at company operated Carl's Jr. restaurants increased 3.8% versus a 2% increase in the prior year quarter. Same-store sales at company operated Hardee's restaurants increased 3.3% on top of a 2.9% increase in the prior year quarter.

During second quarter, both brands promoted the prime rib burger, our most recent meat as a condiment offering. The burger features a 100% Black Angus charbroiled beef patty, sliced prime rib, grilled onion, Swiss cheese and a horseradish sauce on a ciabatta roll. This burger is a great example of our premium quality products strategy that carries our value message to our guests that extends beyond a price point.

On a consolidated basis our restaurant operating costs for second quarter were 80 basis points favorable to the prior year quarter. For comparison, in the second quarter of fiscal 2008 our restaurant operating costs were 300 basis points unfavorable to the prior year quarter. Payroll and other employee benefit expense for the second quarter of fiscal 2009 decreased 140 basis points. This improvement is the combination of price increases and cost control initiatives implemented over the past year as well as favorable leverage from positive same-store sales and a decrease in workers’ compensation claims expenses versus the prior year quarter.

Food and packaging costs increased 20 basis points due to higher commodity costs for beef, cheese, potatoes and oils. Occupancy and other expenses increased 40 basis points due to higher utility costs and depreciation expense related to our ongoing remodel program at both brands.

Second quarter net income was $12.3 million, a $700,000 improvement over income from continuing operations in the prior year quarter despite the re-franchising of 155 Hardee's restaurants over the trailing 13 periods. Our second quarter results include a $1.9 million benefit related to our interest rate swap agreements, which was more than offset by a $1.9 million increase in facility action charges and a $1.2 million increase in stock compensation expense.

Diluted earnings per share for the quarter were $0.23, a 27.8% improvement over the prior year quarter. This year's earnings per share benefited from an 11 million share or a 16.8% reduction in our diluted shares outstanding versus the prior year.

During the quarter the company opened 4 new units, our domestic franchisees opened 7 new units, and our international licensees opened 11 new units, for a total of 22 units. For the first half of fiscal 2009, we and our franchisees added 20 net new units, raising our consolidated unit count to 3,100 units. We remodeled 55 company operated Carl's Jr. and Hardee's restaurants during the second quarter. As of the end of the second quarter, we have remodeled 315 restaurants or about 34% of our company operated restaurants.

We also completed 12 company operated dual-branded Green Burrito and Red Burrito conversions during the quarter. At the end of second quarter, we and our franchisees had a combined total of 421 Carl's Jr. units dual-branded with Green Burrito and 98 Hardee's units dual-branded with Red Burrito, including 200 Green Burrito and 80 Red Burrito company operated dual-branded units.

G&A expense in the second quarter increased $800,000 over the prior year quarter. Increased share-based compensation expense more than offset spending reductions as well as a decrease in G&A related to our refranchising initiative. For the first half of 2009 we've reduced our G&A expense by $800,000.

We reduced our bank and other long-term debt by $2.7 million during second quarter, lowering our debt from $351.1 million at the start of the year to $328.4 million. Our outstanding debt will decrease by an additional $15.2 million by October 1, when we exercise our option to call any remaining outstanding portion of our 2023 convertible notes.

We also reported same-store sales for Period 8 yesterday. For the 4 weeks ended September 8, blended same-store sales increased four-tenths of a percent. Hardee's same-store sales increased 1.1% during Period 8. On a two-year cumulative basis, Hardee's same-store sales have increased 4.6%. Same-store sales at Carl's Jr. were essentially flat for Period 8. On a two-year cumulative basis, same-store sales at Carl's Jr. have increased 1.1%. Sales at both brands were impacted by a number of factors, including our reluctance to participate in the aggressive discounting tactics of our competitors, the direct impact and/or remnants of three tropical weather events, and a reduction in the number of completed remodels at Carl's Jr. versus the prior year.

As of the end of Period 8, the blended average unit volume for our company operated stores was $1.211 million, a $49,000 increase over the end of fiscal 2008. Carl's Jr.'s average unit volume was $1.527 million, a $34,000 increase over fiscal 2008 and an all-time high for the brand. Hardee's average unit volume was $976,000, the highest average unit volume for the brand as far back as we can check. Hardee's average unit volumes increased $22,000 since the end of fiscal 2008 and we continue to approach our goal of a $1 million average unit volume for the brand.

In summary, while many of our competitors responded to the ongoing macroeconomic challenges by offering lowpriced margin impairing products, we continued to differentiate our brands by focusing on premium priced innovative products. We also maintained our focus on improving our margins without sacrificing the quality of our products and on reducing our expenses without damaging our underlying business. As a result, we increased same-store sales, reduced our restaurant operating costs, and improved our profitability. We increased net income while making investments in our business through new units, remodels and dual-branded conversions while at the same time reducing our debt.

I will now turn the discussion over to Ted Abajian, our Chief Financial Officer, for his discussion of our quarterly operating results.

Theodore Abajian

Before I get started I want to let you know that during this conference call I will refer to a slide that we posted yesterday in the Investor Relations area of our website, which can be found at CKR.com. To view the slide, go to CKR.com, click on Investors, and then click on Presentations. You will now see a list of our presentations, and I will be referring to the presentation dated September 17, 2008, which is entitled Q2 Adjusted EBITDA.

In addition, I need to make you aware that during this conference call we will refer to certain non-GAAP financial measures, as explained in our earnings release issued yesterday and in our Form 10Q for the 12 weeks ended August 11, 2008.

During our second quarter we continued to make progress in a number of critical areas, including net new unit growth, re-franchising company operated restaurants, increasing same-store sales and average unit volumes, and reducing our consolidated restaurant operating costs as a percentage of company operated restaurants revenue. To help investors understand the impact of each of these areas on our operating results, I will review how these and other items affected our adjusted EBITDA performance for the second quarter. I'll finish by discussing aspects of our interest and income tax expense.

First of all, I want to review our use of the term adjusted EBITDA as opposed to EBITDA. Adjusted EBITDA, as reported in our Form 10-Q, is calculated using the definition that is provided in our senior credit facility. In our case, EBITDA is adjusted for two items - facility action charges, which is a line item on our income statement, and share-based compensation expense, which is a component of our G&A expense. Both of these items are added back to EBITDA to get adjusted EBITDA.

I now want to refer you to the slide I mentioned earlier, which is available on our website at CKR.com. This slide, entitled Adjusted EBITDA - Q2 FY '08 Bridge to Q2 FY '09, identifies and quantifies the primary factors impacting our adjusted EBITDA performance for the second quarter of FY '09 as compared to the second quarter of FY '08.

Second quarter adjusted EBITDA increased by approximately $2 million versus the prior year quarter. The factors behind the increase in adjusted EBITDA can be put into two categories, as shown on the slide. The first category is changes in restaurant count and the second category is changes in operating results.

In the changes in restaurant count category, the combination of restaurant closures over the past year and the sale of our La Salsa brand last July resulted in a $400,000 decrease in adjusted EBITDA during the second quarter. The refranchising of 155 Hardee's restaurants and the sale of 3 Carl's Jr. restaurants over the trailing 13 periods resulted in a net decrease in adjusted EBITDA of $2.1 million for the quarter. These decreases in adjusted EBITDA were partially offset by a $700,000 increase in adjusted EBITDA related to the opening of 20 new company operated restaurants over the past year and a $600,000 increase in adjusted EBITDA from franchise operations, which excludes the impact of the re-franchising activities.

Moving now to the changes in operating results category, our 3.6% blended company operated same-store sales increase provided a $2.1 million increase in adjusted EBITDA for the quarter. In addition, a 70 basis point decrease in same-store restaurant operating costs resulted in a $1.4 million increase in adjusted EBITDA for the quarter.

To summarize, second quarter adjusted EBITDA grew by $2 million despite the negative impact that refranchising had on EBITDA during the quarter. We achieved this increase by growing same-store sales and decreasing restaurant-level operating costs at our company operated restaurants, opening new company operated restaurants and by growing our franchise operations both domestically and internationally.

Moving to the income statement, company operated restaurants revenue for the second quarter of fiscal 2009 was $267.1 million, a $20.7 million decrease due to the re-franchising of 155 Hardee's restaurants, which more than offset the opening of 20 company operated restaurants and the impact of positive same-store sales over the prior year quarter.

Second quarter operating income of $22.9 million was down about $500,000 from the prior year quarter, however it must be noted the facility action charges, which were $350,000 for the quarter, were $1.9 million unfavorable to the prior year quarter as a result of greater gains on re-franchising transactions recorded in the prior year quarter and higher impairment charges in the current year quarter. Excluding the unfavorable impact of facility action charges, second quarter operating income would have increased by $1.4 million as compared to the prior year quarter.

Interest expense was $2.4 million for the second quarter, down $2.1 million from the prior year quarter. This decrease in interest expense is primarily attributable to a $1.9 million or $0.02 per diluted share favorable adjustment to our interest rate swap agreements.

Our effective income tax rate for the second quarter was 41.3%. We expect our effective tax rate for the remainder of fiscal 2009 to be approximately 41%. In addition, we expect that our fiscal 2009 cash income taxes will be approximately 20% of our pre-tax income as a result of our income tax credit carryforwards.

I will now turn the call over to Andy for his closing remarks.

Andrew F. Puzder

As our second quarter results show, we're taking the necessary steps to manage our business in the face of higher commodity and labor costs without negatively impacting our results. We believe there remains a significant opportunity to attract new guests through new unit openings, and the remodeling and dual-branding of our existing store base can contribute to same-store sales growth in the near and long-term.

Our international operations reached another important milestone with the opening of our 300th unit during the second quarter and finished the quarter with 303 units internationally. This represents an increase of 49 units or 19.3% from this time a year ago. With our recently signed agreements for 100 units in China and 25 units in Pakistan, combined with our continued growth in the Middle East, Mexico, Russia and Southeast Asia, we anticipate a doubling of international unit base to more than 600 units by fiscal 2013.

We continue to pursue additional new markets such as Canada and Turkey, as well as additional countries in Europe and South America. We believe our brands continue to hold great potential internationally, and it will be an important growth driver for the company over the coming years.

We will continue to execute our capital plan, making nondiscretionary expenditures in our existing stores, which includes remodels, maintenance and investments in IT and our distribution center. In regards to the discretionary portion of our plan, which includes new units and dual-branding conversions, we will continue to make investments in our business if the projects achieve their necessary respective rates of return.

As we indicated during our previous call in June, we reduced our capital plan to reflect our re-franchising initiative as well as the slowdown in the real estate market and our ability to remodel our stores. We are projecting capital expenditures of $120 to $130 million for fiscal 2009 and intend to fund our capital needs through our existing cash balances, operating cash flows, and proceeds from our re-franchising initiative.

We currently expect to make capital expenditures of $354.2 million between fiscal 2009 and fiscal 2011. This includes an approximately equal mix of discretionary and non-discretionary spending. We will adjust this number as necessary depending on domestic economic conditions and the needs of our business. We're obviously, like all of you, very intently watching the domestic economic situation and we will continue to monitor it closely.

Since our initial announcement last April, we've re-franchised a total of 224 company operated Hardee's restaurants. This includes 65 in the first half of fiscal 2009 and 23 units subsequent to the end of the second quarter. The franchisees that acquired these units, including new and existing Hardee's franchisees, as well as existing Carl's Jr. franchisees, have agreed to build an additional 105 restaurants in these markets.

At our annual shareholders meeting in June we announced a reduction in our projected company operated Hardee's openings for fiscal 2009 from 12 units to 7. The primary reason for the reduction was the slowdown in commercial and residential real estate construction, resulting in fewer high quality sites available for us to build new units. Given this ongoing slowdown, we are also reducing our projection for company operated Carl's Jr. restaurants for fiscal 2009 from 24 to 20. As is the case with Hardee's, we will not build new Carl's Jr. units simply for the sake of building.

We still anticipate our Carl's Jr. domestic franchisees will open 37 units and our international franchisees will open 20 units, for an aggregate total of 77 new Carl's Jr. units in fiscal 2009, up from 69 in fiscal 2008. On the Hardee's side, we project our domestic franchisees will open 13 units and our Hardee's international licensees will open 25 units. In all, we and our franchisees expect to open a total of 45 new Hardee's in fiscal 2009.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christopher O'Cull - Suntrust Robinson Humphrey.

Christopher O'Cull - Suntrust Robinson Humphrey

To start out with just Carl's Jr., the comments you made about some of the competitive intrusion you're seeing. Are you guys expecting to maybe add any new items to that middle tier, the value section of the menu, at Carl's?

Andrew F. Puzder

I mean, we do have value menus. We're inclined to wait out the worst of this. It's not part of our long-term strategy to compete in the low quality, low priced value area, and since we have a hard time seeing our competitors can be making much of a profit selling double cheeseburgers at $0.99 so they can - really, I don't think they can keep it up for long before their franchisees start filing lawsuits against them or going bankrupt.

So our same-store sales could lag a little in the short term. This period was a lag. But we'll be making more money promoting higher quality, higher margin products than we would if we tried to sell lower no-margin items like everybody else seems to be doing these days.

Our second quarter results I think are a testament to the bottom line effectiveness of the strategy. We've always had a few value options for our price-sensitive customers, but we have also steered clear of value menus since they're really inconsistent with our higher quality food positioning. And I've got, you know, not to pick on competitors and so I'm not going to mention who it is, but we've got one competitor who has a cartoon character come out and talk about how much better they are than fast food and then comes out and is hawking basically the same kind of cheap, low quality food that everybody else is selling. And we don't want to erode our quality food positioning in that way, trying to tell people we're one brand and then coming out with something else.

However, we do have a few value-priced offerings for our price-sensitive customers that we think are really good deals. Given what happened with beef costs, we've replaced some of the lower-cost burger options at Hardee's with higher margin alternatives like jumbo chili dogs and hot ham and cheese sandwiches, and I think that was very effective for us at Hardee's towards the end of the summer and in Period 8.

You know, Hardee's got hit with remnants of some of those storms, which really took same-store sales down significantly on a couple of days. My fatherinlaw in St. Louis had like three feet of water in his house, you know? So those storms you heard about in hitting Texas, but they really went through the Midwest and Southeast.

But I think that was very effective for Hardee's. At Carl's we're actually working on, we have a very good burger offering, value burger offering, that we're now trying to upsell cheese on to improve the margins on it so we don't have to take the price up. They may not sound like a big deal, but adding cheese to a value product raises the price by $0.30 and therefore significantly improves the margins on those products.

So the answer is, and I don't want to get into this too much for competitive reasons, but we are doing the kinds of things Carl's Jr. and Hardee's would do to address the value problem. We're not just letting these customers go away, although the value customer, again, is your lowest margin, your lowest profit customer. And I'm not going to try and compete with people that are giving food away, and we actually had instances this quarter were people were literally giving the food away.

But we've got our agency and our marketing people working on some very creative ways to address the value customer and the affordability issue and, you know, we think we'll be real successful at it. We think this period or this period of time is really not indicative of a trend unless, you know, hurricanes and remodel impacts are indicative of a trend.

But we'll address the value issue in kind of our own way, which will be different than the way other people address it.

Christopher O'Cull - Suntrust Robinson Humphrey

Moving on to food costs, it looked like there was a divergence in food cost as a percentage of sales for Carl's and Hardee's during the quarter. Ted, could you give us a little explanation for that?

Theodore Abajian

Yes. Chris, it's really primarily due to beef costs, which are a significantly greater impact at Carl's than at Hardee's. And then Hardee's also has the benefit of 45% of its business at breakfast, where we actually did see pork costs come down for the quarter, which Carl's doesn't really see that much benefit resulting from pork. Beef, unfortunately, has spiked; impacts Carl's substantially more than Hardee's. And that's really the main issue that happened there.

Christopher O'Cull - Suntrust Robinson Humphrey

Is your primary exposure right now with your food contracts boneless beef?

Theodore Abajian

I would say yes. And John Dunion's here as well, if you want to add anything to that, John.

John J. Dunion

I think we've talked in the past that our cost of sales exposure on the beef sector is roughly 20% to 25%, and of that, the majority of the costs lie in the trimming markets. And I think you've seen the record spike occurred on the average in August, late July, and the numbers are coming off, but they're coming off in very small increments.

Christopher O'Cull - Suntrust Robinson Humphrey

Now potato, have you guys contracted the potato needs?

John J. Dunion

Negotiations are under way right now for a contract that would begin in November.

Christopher O'Cull - Suntrust Robinson Humphrey

Any expectation right now?

John J. Dunion

The acreage and the crop production in North America is expected to be the smallest since 1990.

Christopher O'Cull - Suntrust Robinson Humphrey

And potatoes are roughly what percentage of you all's cost of sales?

John J. Dunion

I don't think we've released that, have we, Ted?

Theodore Abajian

No, but it's in the single digits.

Christopher O'Cull - Suntrust Robinson Humphrey

And then, Ted, worker comp adjustments seem to have benefited labor costs for the last several quarters now. How sustainable are these adjustments?

Theodore Abajian

I think that they're becoming much more normalized. Of course you recall last year we had a relatively large adjustment in the second quarter, so we're rolling over that this quarter. Overall this quarter, the adjustment wasn't that significant overall. So I think we're trending down to a level that, while it's difficult to predict these things, like most things, they're trending to a level that hopefully is relatively minimal and hopefully not something we're talking about very often.

Christopher O'Cull - Suntrust Robinson Humphrey

Two other questions related to the capital structure. There's no [AMO] on your term debt, right, between 2012?

Theodore Abajian

No. I mean, the revolver comes up in the middle of 2012 and the term loan in 2013, and there's minimal amortization between now and then. So it's a very effective credit facility for us, and we're very thankful to have it in place, especially during times like we're in right now.

Christopher O'Cull - Suntrust Robinson Humphrey

And the last one, just related to covenant levels, it looks like, guys, there's about 15%, 20% cushion on EBITDA?

Theodore Abajian

Well, I mean, our main covenant that you would focus on would be the leverage covenant. We need to maintain below 3.0 leverage, which we're at approximately 2.1, 2.15. So we've got significant cushion in the leverage covenant.

Operator

Your next question comes from Anton Brenner - Roth Capital Partners LLC.

Anton Brenner - Roth Capital Partners LLC

I'm just kind of wondering, given the commitment for franchisees to build their stores as part of this refranchising effort, if there's going to be a credit problem in some of those franchisees obtaining the financing required to be able to in fact do that?

Andrew F. Puzder

Well, you know, we haven't - who knows? The big credit hit obviously just came down yesterday. Prior to yesterday I know people were able to build new stores. A lot of these guys build, you know, the ones that have very minimal requirements, build in a lot of their existing cash flow and they like to do that to the extent possible. But obviously, if people can't buy money to build stores, there's going to be less building of stores everywhere.

But who know? At the moment, I just don't know. Ted, do you have a better feel for that?

Theodore Abajian

No, I think that's accurate. The one distinction I would say, franchisees more often do tend to do sale-leaseback transactions with their landlords, so they're putting up a little less capital upfront. But landlords may have less access to capital, too. That's certainly possible.

Anton Brenner - Roth Capital Partners LLC

Are there any regional differences you're seeing in sales trends or demand or competitive levels?

Andrew F. Puzder

I would say the biggest regional impact this last period and towards the end of the second quarter was from the storms that went through. You know, you would have a couple of days where you'd have regions that were really severely impacted. Now we don't have a lot of restaurants in Texas and we don't really have any, I think, that were impacted by the hurricane. And we have very few in kind of the Louisiana area. We do have some up through Alabama.

But the aftermaths of these storms, I think, were more impactful than you might think watching the news because I think the impacts of the storms were so significant that people didn't really follow the storms as they went up through the Midwest or when Fay went up through the Southeast.

So that would be the biggest difference. I'm not noting any - Ted, maybe you are, but I'm not seeing any real significant regional differences otherwise. I think Florida's not as strong this year as it has been in prior years because not as many people are probably traveling down there. I notice differences in some of our seaside restaurants where in prior years you had a lot of traffic going to those areas and this year not as many people are driving out there or they're trying to use less gas. So I see those kind of differences, but that's not just, for example, in the Southeast. That's kind of everywhere that you have a restaurant that's in a touristy kind of area.

And that's about all I'm seeing. Ted, are you seeing anything?

Theodore Abajian

No, I'd say that's accurate.

Anton Brenner - Roth Capital Partners LLC

Is it reasonable, given some of the declines we've seen in various commodity prices, [inaudible] oil, wheat and so on, to think that food costs as a percent of your sales are going to continue to improve sequentially?

Andrew F. Puzder

Well, we're certainly going to do everything we can, Tony, to see that that happens. But you have to keep in mind that with, for example, if we've got - you know, beef is a good indicator. If beef comes down some, that'd be great, but it's still way, way above where it was last year. And since we're not hedged on beef, when you see movement in beef, you know, if you see beef prices improve you're going to see the margins at Carl's Jr., for example, improve.

On the other end, there's certain things where we're hedged forward and until the price comes down below our hedge and our hedge expires, you're not going to see the kind of impact you might see. So, for example, on wheat, if we're below the market price currently and the market price comes down but not as far as our hedged amount, then we're not going to get a benefit. If it comes down below our hedged amount and the hedge term expires, then obviously we're going to come in again and you will see a benefit. So other than beef and a couple of the things that we don't have hedged going forward, the impact's probably delayed when you see the commodity prices come down.

But obviously, as commodity prices come down it's going to be, over the long term, over the term of a year or half a year, you're going to see substantial benefits to our restaurant operating costs because everything we're fighting right now is basically a fight over commodity costs. And with commodity costs start to come down, we're still going to have the benefit of all the expense reduction and profit improvement initiatives that we've taken over the past year. Those are all still going to remain in place, as are the higher prices. And therefore when commodities do start to come down, you should see a very significant improvement.

Theodore Abajian

Tony, I would just add to that that while commodities have come off their peaks earlier this summer, they are still elevated above prior year levels. So, again, while the trend is certainly good and, with the exception of beef, which has gone up and is above prior year significantly, the other commodities, which are down from their highs earlier in the year, are still also above prior year levels. So we still have some room to go for commodities to come down.

Operator

Your next question comes from Rachael Rothman - Merrill Lynch.

Rachael Rothman - Merrill Lynch

In the past couple of quarters you guys have kind of helped frame the margin opportunity, either up or down. Can you give us an outlook on what you are thinking for the balance of the year or at least the upcoming quarter?

Andrew F. Puzder

Well, normally we don't do that, at least we haven't in the past. We try and give you guys as much guidance as we can with our end of the quarter period same-store sales releases and to keep you up to date during the quarter with period same-store sales releases.

But, Ted, is there anything you're comfortable saying?

Theodore Abajian

Thanks for putting me on the spot, Andy.

Andrew F. Puzder

You're welcome. Well, that's about all I was comfortable saying, so I thought I'd pass it on.

Theodore Abajian

No, you can't [inaudible]. I mean, of course it's difficult to project. It's very early in the quarter for us right now. As Andy said, we're certainly very focused on that restaurant level margin line item, and John and his team are doing everything they can to buy the products properly. And marketing's doing everything we can in terms of pricing. It's a tough environment, but we're working very hard at it.

Andrew F. Puzder

I will say that I don't see period to date same-store sales as a long-term trend. I think our sales should be better than that. I think this is a short-term thing impacted by the items that we put forth in our press release and were in the script this morning. And, as I said, I don’t think the competitors can maintain this level of discounting and actual food giveaways for very long. So we're going to maintain our discipline and our profitability and try and address those issues in the short term.

Rachael Rothman - Merrill Lynch

Can you talk about how much price you're carrying and how much of the check change is attributable to price versus mix?

Andrew F. Puzder

We took - and we haven't made the amount of pricing that we've taken public. And I know some people do that, but it's kind of a difficult number to come up with because our franchisees obviously price different than we do. And we price differently in different regions, in different areas, even different restaurants within a region, you know, some being on a freeway and some being off.

But Ted, we have not disclosed our percentage increases, have we?

Theodore Abajian

No, we have not. But we've certainly been as aggressive as we think we can be. We've talked a lot about the fact that we've begun to be more aggressive in pricing over the past year, and we'll continue to use that as we can.

Andrew F. Puzder

And the commodities have been going up at a rate where it's been - I don't think really anybody's been able to keep up with the increases, to keep up with the increases in commodity costs solely through pricing. So it's been a real battle over the last year, which is one of the reasons we were very pleased with the results in second quarter is because we're beginning to see the results of the actions that we've taken.

Rachael Rothman - Merrill Lynch

I guess asking it a different way, as you guys begin to lap the price increases towards the end of the year, how much additional pricing power do you think you have going forward to support your margins?

Andrew F. Puzder

Well, I think as long as commodities continue to go up we'll have - everybody will be raising their prices. And when everybody raises them, you automatically have some room to raise. The problem is that you end up with the value versus affordability issue and your product - and this is everybody's - may be considered a good value, but the question is can the public afford those products. So you need to try and address both issues.

I do think we have room on our value products to go up in price, but we also need to address the affordability issue and make sure we maintain some products that people can afford who have less money than they used to have in the past. And that doesn't mean giving food away or discounting things to where you're selling them for less than they cost you, but there are ways to do that. And I said I don't want to really get into that for competitive reasons because we have some pretty creative ideas that we're actually testing and working on right now that should be out shortly.

But that's the dilemma and that's the challenge of this current environment.

Rachael Rothman - Merrill Lynch

And then just finally I think you were adjusting the Carl's company operated unit target for the year but didn't move the Capex. Is that correct?

Andrew F. Puzder

Well, we reduced it by four units, so that would reduce - and I would say that was within the range that we gave you.

Rachael Rothman - Merrill Lynch

Okay, so now you may be at the lower end of the $120 to $130 versus, you know, kind of the higher end before?

Andrew F. Puzder

Yes, we'd be four units closer to the $120, that's right.

Operator

Your next question comes from Keith Siegner - Credit Suisse.

Keith Siegner - Credit Suisse

Hopefully this question will come across as clear but, you know, one thing we've kind of noticed as we watch like the monthly comp trends is how big an impact the introduction of a new limited time offering seems to have. And maybe, as opposed to going after value, it seems like the months that you have a new LTO are much stronger. Could it make sense in this type of environment to maybe be a little bit more quick or more nimble with new LTOs, particularly the big burgers? Maybe give people a reason to come into the store a little bit more often? Is that even feasible operationally? Just curious how you think about that.

Andrew F. Puzder

Well, actually - and I'm very sympathetic to questions being clear because I feel that way about the answers a lot of the time as well - but with new products, the issues, well, there's two issues. One is you want to make sure, we're always very careful to come up with new products that we think are really very good quality products, which is why I think you see our competitors copying us on new products so often. Our new product development team works very hard at that.

When you get a new product, for example, right now with the prime rib thickburger or prime rib $6 burger, depending on the brand, we have a couple of things that aren't normally in the store. One is the prime rib, one is the ciabatta roll, and another would be horseradish sauce. So when you bring those in you have to kind of plan how long the event's going to go because you don't want to be stuck with a lot of prime rib at the end of an event if it ends too soon. But you have to buy enough quantity that you can sustain the event over a period of time. And we do that generally, if a burger's not going to remain on the menu, what we do is we, even though we might be promoting another produce, you keep that product on the menu for a period of time to try and make sure that you exhaust the quantities of commodities that you purchased in connection with that item.

The second thing is you don't want to overwhelm your operators. Hardee's used to be, when our team came in and took over, Hardee's was the discount variety product of the month club brand, and it messed operations up to the point where Hardee's had really declined to about a $716,000 average unit volume and the restaurants weren't run very well because they were very complicated to run. It was very hard at that point to run a Hardee's. It's much simpler now.

So taking those things into consideration, you can and one of the options for us obviously is to have more new products more regularly. And we can do that and that may well be part of what we do going forward.

The other difficulty is you want to make sure that you've got advertising dollars to promote those products, because putting a new product in and not telling anybody about it doesn't help you like putting in a new product and having that kind of media push behind it. So you may have to dedicate more dollars to media spending as well.

So balancing all those issues, you can introduce more LTOs and they do have a positive impact when you introduce them, but you need to be careful, too, not to go to the well too many times. People will start expecting them every month. You're going to hurt your margins because you're going to have leftover product. You're not going to be able to promote them sufficiently and you might give your operators difficulties in actually making all these things regularly.

So I hope that answer was clear. Those are the factors that you have to balance.

Keith Siegner - Credit Suisse

So then the last question along those lines is will there be a new premium LTO coming to Carl's in one of the next several periods?

Andrew F. Puzder

Oh, yes. I think we've got one coming up pretty shortly here. When I say shortly, within the next two, three weeks.

Operator

Your next question comes from Conrad Lyon - Global Hunter Securities, LLC.

Conrad Lyon - Global Hunter Securities, LLC

Let me focus on average check. You guys did I think a fantastic job at getting your check up at Hardee's this quarter. I don't think we've seen increases like that since fiscal '05. And I thought this was interesting, too. Your transactions, while down, were less [inaudible] decline in the prior quarter. So that being said, can you give us a feel of kind of what's going on there in terms of how people are purchasing? Was that mainly price, that increase, or can we expect to see pretty good flow through on the margin side here from Hardee's going forward?

Andrew F. Puzder

I wish I had the crystal ball to tell you going forward and I might even have felt better kind of predicting things three days ago than I do today, but, you know, you can drive transactions at just about any time by doing a coupon or offering some - you know, we have reader boards on our - the long polls with the Hardee's sign at the top has a reader board in most places, which you can't do in California because of local ordinances. You put something on that reader board that, you know, I don't know, two strawberry biscuits for $0.99 or some kind of value offering, and you can drive your transactions up.

On the other hand, if you do some drive-thru offering, your transactions will go down because generally, no matter how many people are in a car, you generally only have one check. So the transaction trend's a little difficult to predict and, while it's something we watch and it's something our marketing people are very concerned about, I think we probably have more of a focus on the dollar volume of sales that we do and the profitability of those dollars.

But I don't know. Ted, have you got any predictions on transactions?

Theodore Abajian

No. You know, I think you explained it well. It's obviously very difficult to predict, and it's very much a function of the products we're promoting and any type of incremental discounting that we may do from time to time, which is limited.

Conrad Lyon - Global Hunter Securities, LLC

Maybe let me frame it this way: The check increase I thought was impressive, yet it seemed like you're not getting that much pushback so I just wanted to see if you've had a sense perhaps from your customers that this type of pricing can be sustained? Because it seems like it can be, from our perspective.

Andrew F. Puzder

Yes. I think that it can be. I think our pricing at Hardee's, we are not getting the kind of pushback that we would have gotten if we had done this, say, two years ago. People realize that prices on everything are going up and they're more accepting of that.

Now that's, to hearken back to something I said earlier, that means you need to come up with some creative midtier products to try and make sure that, when people have less cash in their pocket, they still feel like they can come to your restaurant. You need to do that without giving the food away or sacrificing your margins, which is a difficult balancing act.

But I think the numbers are indicative of the fact that we're not getting the kind of pushback we would have gotten.

Theodore Abajian

I would add, you know, remember we were promoting the prime rib burger at both brands during the quarter, which is a very high priced premium sandwich, the highest we've offered. So that has a positive impact on check.

Operator

Your next question comes from Brian Moore - Wedbush Morgan Securities Inc.

Brian Moore - Wedbush Morgan Securities Inc.

I have a question on margins, I guess, in terms of blended same-store sales for fiscal Q3. Could you talk to maybe a level of same-store sales that might be needed to maintain flat margins year-over-year? And if you're not able to give a precise number, maybe you could frame it in the context of kind of a 2% kind of comp number. That's been the historical kind of inflationary break point for other chains in terms of margin degradation of expansion.

Andrew F. Puzder

I don't know if I could do that for you. We normally average about - I don't know, over the last, I don't know, 10 or so years at Carl's and probably the last 5 or so years at Hardee's, since we've been doing thickburgers - we average 2.7% to 3% same-store sales increases a year. But I don't have a same-store sales margin percent with how it impacts margins, sales percent as it impacts margins, because it depends upon what we're selling.

But, you know, Ted, maybe you've got some number you use for forecasting?

Theodore Abajian

You know, it used to be, obviously, a lot easier to make those kinds of statements because commodities were relatively benign and that has changed so much that, you know, I think using Q2 as a proxy, we were up 36 in Q2 and saw some expansion although, you know, in fairness, some of that was due to favorable workers’ comp comparison to the prior year.

So I think if I was going to throw a number out, I think you're going to see similar levels of same-store sales in order to achieve a good margin comparison. And even that, you know, it's hard to say depending on what may happen in commodities tomorrow.

Brian Moore - Wedbush Morgan Securities Inc.

And then just a second and final question. Clarifying the new premium burger LTO for upcoming, is that going to be an entirely new product or it'll be a reintroduced product like the Philly cheesesteak burger or guacamole burger?

Andrew F. Puzder

It'll be - you're talking about at Carl's?

Brian Moore - Wedbush Morgan Securities Inc.

At Carl's, correct.

Andrew F. Puzder

The next product coming out at Carl's I think is a revisit of a product, which really have worked very well for us in the past which is why we keep revisiting them. But I believe it will be a revisit.

Operator

And there are no other questions in the queue at this time.

Andrew F. Puzder

Well, thanks everybody. We were very happy with our second quarter and we're anxious to get our hands around third quarter and come back and speak to you once again. Everybody stay calm out there. This isn't the end of the world - and I'm talking about the financial markets, particularly you people from New York. Stay calm. And we'll talk to everybody soon. Thank you.

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