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Just last week, CKR management stated that Carl’s Jr.’s fiscal 2010 period 2 same-store sales would be down mid single digits as a result of a difficult comparison and continued discounting by its competitors. Today, we learned that Carl’s Jr.’s comparable sales trends were actually worse than management’s guidance as they declined 7% in period 2 (which I recognize as more of a high single digit decline). Despite this worse than expected result in period 2, Carl’s Jr.’s 2-year average trends did improve sequentially from period 1, but remained negative. Again, management blamed the concept’s weakness on “headwinds we faced from the ongoing deep discounting of low-quality menu items by our competitors, which negatively impacted sales at both our brands.”

CKR – WILL CARL’S JR. HOLD THE LINE ON VALUE? - CKR CJ FY10 period 2

Management stated in its press release that it is “working diligently to get Carl’s Jr. back on the positive same store sales track” and then goes on to say that “keeping with our strategy of offering our guests a casual-dining quality burger at a fast-food price, Carl’s Jr. debuted the Kentucky Bourbon Burger on Mar. 11.” This new burger is being offered as one of the company’s Six Dollar Burgers. Management recognizes that it is its premium strategy focus that is hurting sales at Carl’s Jr. in this current environment, and yet, it seems to think that keeping with the strategy will work to return Carl’s Jr. to positive same-store sales growth.

The company has proven that it is more difficult to hold the line on value as sales declines worsen because Carl’s Jr. returned its Jumbo Chili Dogs to the menu, which sell 2 for $3. But, again, in keeping with its more premium-focused strategy, management stated on its earnings call last week that it would not use media support for its lower priced items, including the 1/8 lb. burgers it expects to return to the menu.

Same-store sales at Hardee’s grew 3.1% in period 2 versus the concept’s easiest comparison from FY09. Ironically enough, the company said the comparable sales strength “validates the success of our premium product strategy.” So the premium strategy is helping Hardee’s and hurting Carl’s Jr.?

I understand the motivation for not wanting to discount. It hurts margins and could put the company’s brand positioning at risk, particularly once the economic environment improves. Holding the line on value in the near-term, however, is going to continue to put pressure on Carl’s Jr.’s sales performance relative to its competitors. As I have said before (please refer to my March 26 post titled “Is Market Share Shifting?”), I think that given the current casual dining discounts, the big market share shifts to QSR from casual dining are likely over. With casual dining restaurants offering more competitive value options, it will become increasingly more difficult for QSR players to win market share with premium-priced menu items. I think this is made clear by Carl’s Jr.’s declining same-store sales trends.

The issues at Carl’s Jr. have been magnified by today’s more challenging environment. Looking at the concept’s same-store transaction growth trends (please see chart below), 2-year average trends have been negative for some time now, highlighting the fact that trying to sell higher-priced menu items in a difficult economy is not the only problem facing Carl’s Jr.

CKR – WILL CARL’S JR. HOLD THE LINE ON VALUE? - CKR CJ Same store transaction