CKE Restaurants, Inc (CKR: chart)
Q3 2009 Earnings Call Transcript
December 11, 2008 9:00 a.m. 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

Anton Brenner – Roth Capital Partners
Conrad Lyon - Global Hunter Securities
Brian Moore - Wedbush Morgan Securities.
Christopher O''Cull - Suntrust Robinson Humphrey
Karen Chan for Keith Siegner - Credit Suisse
Chris Sipple (ph) – Blueline Capital
Rachel Rothman - Merrill Lynch
Josh Rosen -- RLR Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to the third quarter 2009 CKE Restaurant’s earnings conference call. (Operator Instructions) At this time, all participants are in a listen-only mode. We will facilitate a question-and–answer session towards the end of this conference. If at any time during the call you require assistance please press”*0” and an operator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now introduce Mr. John Beisler, Vice President, Investor Relations. Please proceed, sir.

John Beisler – Vice president of Investor Relations

Thank you. Good morning everyone. Thank you for joining us. My name is John Beisler, Vice President of Investor Relations for CKE Restaurnats. CKE Restaurants is hosting this conference call to discuss our results for the 12 weeks ended November 3rd, 2008. Yesterday CKE issued a pair of press releases announcing its financial results for the 12 weeks ended November 3rd, 2008 and same-store sales for the 4 weeks ended December 1, 2008. These releases are available on our website, 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 in turn will refer to our third quarter fiscal year 2008 earnings conference occasion that we posted on our website this morning in the Investor Relations area and once again the website is www.ckr.com. To view the presentation, click on investors and then click on presentations. You’ll now see a list of our presentations and we’ll be referring to the presentation dated December 11, 2008 which is entitled Q3 fiscal year 2009 earnings call. Andy will begin today''s presentation with a few comments regarding our third quarter results as well as our Period 11 same-store sales results. Ted will then review our third 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 our 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.

Thanks and you should now hear Andy Puzder, our President and CEO.

Andrew F. Puzder – President & Chief Executive Officer

Thank you, John and good morning everybody. The third quarter of fiscal 2009 presented unprecedented challenges for CKE Restaurants and our economy in general. Despite these challenges, we increased same-store sales and average unit volumes at both our brands even as our competitors resorted to historic levels of discounting. Moreover in part because we declined to participate in the successive discounting, we were able to reduce both food and labor expense as a percentage of company operated restaurant revenues versus the prior year quarter. We also accomplished the sales increases and operating expense reductions, while maintaining and in some cases improving very positive consumer perceptions of our brand in the six attribute ratings on which we focus and which consumers rank as most important to them when selecting a restaurant. These attributes are taste of the food, quality of ingredients, temperature, friendliness cleanliness, and accuracy. To measure the consumer perception we use Sandelman Research which is research that we subscribe to and not research we commission. They do it, whether we buy or not and the top two box analysis, graphs reflecting that research and comparing us to our largest competitors, are set forth on pages 8 through 19 of the earnings call presentation.

On the financial side, we continue to execute our scaled back capital plan while reducing our bank and other long-term debt year-to-year by $32.6 million from the end of fiscal ’08. We continue to reduce G&A expense for a year-to-date reduction of $4.1 million excluding a $1.8 million increase in share-based compensation expense. We also continue to improve our adjusted EBITDA and are now $3.5 million ahead of last year’s adjusted EBITDA through the first three quarters despite an $8.2 million negative impact to adjusted EBITDA from our re-franchising of 118 Hardee’s restaurants over the past four quarters. On page 28 of the presentation you’ll find an adjusted EBITDA bridge chart showing certain items that affect our adjusted EBITDA over the first three quarters of this year versus the first three quarters of last year. Third quarter net income was $5.4 million or $0.10 per diluted share versus $6.2 million or $0.11 per diluted share in the prior year quarter. Income from continuing operations was 5.4 million or $0.10 per diluted share versus 7.5 million or $0.13 per diluted share in the prior year quarter.

This quarter’s results include 4.9 million of interest expense to mark-to-market of interest rate swap agreements versus a $1.8 million expense in the prior year quarter. These mark-to-market accounting charges do not represent interest expense that we are actually paying in the current quarter. In fact when we make interest payments related to our swap agreements in future quarters, those payments will not result in additional interest expense, since we are booking the charge now, even though we are not paying it now. It is important to note that there would likely be additional mark-to-market payments, either favorable or unfavorable in future quarters as interest rates continue to fluctuate. Absent the additional interest expense related to our interest rate swap agreements, income from continuing operations would have been $8.3 million or $0.15 per diluted share in the third quarter versus income from continuing operations of $8.6 million or $0.15 per diluted share in the prior year quarter.

Finally, on a trailing four quarters basis our diluted earnings per share from continuing operations stand at $0.64 versus $0.57 as of the end of fiscal ’08. All in all, our focus on reducing our operating expenses, combined with our focus on quality, taste, service and cleanliness, resulted in a positive quarter despite severe financial headwinds, deep competitive discounting, and a difficult-to-fathom accounting rule related to mark-to-market adjustments. With respect to same-store sales, third quarter blended same-store sales increased 9/10th of a percent, our 12th consecutive quarter of positive blended same-store sales. On a two year cumulative basis, blended same-store sales increased 2.6% for the third quarter. With respect to our individual brands, same-store sales, in company’s operated Carl Junior restaurants increased 5/10th of a percent versus 7/10th percent increase in the prior year quarter. Same-store sales in company operated Hardee’s restaurants, increased 1.3% on top of the 2.7% increase in the prior year quarter. Year-to-date our blended same-store sales have increased 2.1% with a 1.1% year-to-date increase at Hardee’s and a 2.9% year-to-date increase at Carl’s Junior.

Page 3 of the presentation sets forth a chart comparing our three quarters same-store sales with those recently reported by other brands. Restaurant operating costs, on a consolidated basis or restaurant operating costs as a percentage of company’s operative restaurant revenues for the third quarter was 15 basis points unfavorable to the prior year quarter. Food and packaging cost decreased 10 basis points despite higher commodity costs for big cheese, potato and oil. This improvement was primarily due to price increases and other initiatives including our ability to increase same-store sales without resorting to low margin high food cost products. Payroll and other employee benefits expense for the third quarter of fiscal 2009 decreased 70 basis points. This improvement is primarily attributable to increased scheduling efficiency and paper roll leverage at same-store sales at Hardee’s. Occupancy and other expense increased 130 basis points due to higher utility costs and depreciation expense primarily related to our on going revamp programs at both brands as well as an asset disposal charges related to the rebuilding of two Hardee’s restaurants. Our restaurant operating expenses as a percentage of company operated restaurant revenue by year for this decade and year-to-date for fiscal year 2009 for Carl’s Junior and Hardee’s are set forth on pages 5 and 6 of the presentation. Carl’s is having its fourth best year this decade and is really only the fourth best year by 30 basis points. Otherwise it would be the third best year with respect to operating expenses and Hardee’s is having its second best year this decade.

During the third quarter, the company opened 8 new units. Our domestic franchisees opened 14 new units and our international licensees opened 10 new units for a total of 32 new units. For the first three quarters of fiscal 2009, we and our franchisees added 27 net new units, raising our consolidated unit count to 3110 units. Our projected system wide unit count to 2014, roted down by company operated stores, domestic franchise stores, and international license stores, is set forth on page 23 of the presentation. Notably, we are currently projecting that by 2014 our system will be 75% franchised and 20% international. With respect to our remodels, we remodeled 15 company operated Carl’s Junior and Hardee’s restaurants during third quarter. As of the end of third quarter, we have remodeled 366 restaurants or about 41% of our company operated restaurants. We also completed 14 company operated dual-branded Green Burrito and Red Burrito conversions during the quarter. At the end of third quarter, we and our franchisees have a combined total of 433 Carl’s Junior units dual-branded with Green Burrito and 109 Hardee’s units dual-branded with Red Burrito, including 208 Green Burrito and 88 Red Burrito, company operated dual-branded units.