What matters most to maximizing shareholder value is how a company deploys its cash flow among growth capital expenditures, maintenance capital spending, and returning cash to shareholders. Ultimately, we believe, it is the rate of new capital deployed in new business opportunities that determines real enterprise value. The restaurant industry is littered with companies whose concepts are well positioned in the marketplace but that continue to push the limits of growth capital spending, which depresses margins, returns, and equity valuations.
- CKRCKR's aggressive capital spending program over the past two years has not generated incremental returns for shareholders, and unfortunately for shareholders, management is not changing the business model. Like other restaurant companies we follow, the company's aggressive rate of capital spending has led to deteriorating financial results. Clearly, the decline in CKR's return on ROIIC has been highly correlated with the company's stock price. We believe that management needs to change its long-term new unit growth strategy, which should help to reverse the declining returns the company is experiencing, particularly at its Hardee's concept.