CKR reported period 7 and fiscal 2Q 2010 same-store sales results this morning. Carl’s Jr. has struggled recently and reported period 7 comparable sales of -5.2%, representing 2-year average trends that were about even with the prior period. On a quarterly basis, CKR’s top-line trends slowed on a sequential basis at both its Carl’s Jr. and Hardee’s concepts, as seen in the charts below.
Judging by how CKR is trading up today, investors seem to be comforted by the fact that the company is guiding to 2Q restaurant level margins of 19.1%-19.4%, about even with last year’s 19.3% number. This is impressive relative to the significant fall off in same-store sales growth, but as I keep saying, this is not a sustainable trend. The company will not be able to maintain these margins if same-store sales continue to decline.
Carl’s Jr. has recently underperformed its QSR peers, largely as a result of its more premium priced menu, which has failed to drive traffic in this tough economic environment. Making things even more difficult for Carl’s Jr., MCD rolled out its new Angus burger in early July. Although the timing is not right for another premium-priced QSR product, I have said that MCD’s new Angus product would put increased pressure on Carl’s Jr.’s sales as MCD is a formidable competitor with a large advertising budget. MCD has not yet launched a national advertising campaign around its Angus burger, but we have seen coupons like the one below.
To that end, today, in a separate press release, CKR warns Carl’s Jr. and Hardee’s “consumers not to fall for the McHype.” The entire press release is focused on McDonald’s new Angus offering. “The Original Six Dollar Burger at Carl’s Jr. has 24 percent more meat than McDonald’s Third Pounders, yet costs the same - $3.99. And at Hardee’s, the 100% Black Angus beef Original Thickburger has just as much meat as McDonald’s Angus burger, but costs 60 cents less. Those are the facts and that’s the value of our burgers.” CKR is even offering a money-back guarantee beginning in mid-September that will give customers a refund if they don’t agree that CKR’s burgers are better than MCD’s Angus burgers.
The fact that CKR is making such a big deal about MCD’s Angus burger makes me believe that the company is feeling increased pressure from this new product. CKR also stated that it will be introducing a new product tomorrow at its Carl’s Jr. restaurants, The Big Carl, which it calls a counterpunch to MCD’s iconic burger, the Big Mac. It is one thing to go after a competitor, but it is another to go after that competitor by name, particularly when that competitor is McDonald’s. MCD can and will beat CKR at the advertising game if it so chooses. In the near-term, CKR may get some attention from its mudslinging tactics as everyone enjoys a good corporate battle! And, the money-back guarantee may increase trial at Carl's Jr., but in the end, MCD will likely win the battle as you can never underestimate the company's marketing muscle.