CKR – TOPLINE TRENDS IMPAIRING MARGIN GROWTH

CKR reported period 13 and fiscal 4Q10 blended same-store sales today of -6.4% and -6.0%, respectively.  The biggest challenge continues to be at Carl’s Jr., which reported a 9.0% comparable store sales decline for period 13.  Although this -9% number is a 65 bp improvement from period 12 on a 2-year average basis, the full fourth quarter result of -8.7% implies 230 bps of deterioration from 3Q10.  Hardee’s same-store sales decreased 2.8% during period 13, which marked a significant fall off from the prior period with 2-year average trends declining more than 100 bps on a sequential basis. 

 

The company attributed weakness at both concepts to continued high levels of unemployment, “deep-discount burger wars” and weather.  Specifically, CKR’s CEO Andrew Puzder said, “Both brands' sales results were also significantly impacted by worse weather this year than in the prior year. Carl's Jr., experienced severe rain in its core West Coast markets for most of the final week of the period and Hardee's experienced severe winter weather in several of its core mid-west and southeast markets.”

 

Despite the impact of weather, CKR’s full year 2010 3.9% blended same-store sales decline came in at the lower end of management's guidance of -3.5% to -4.0%.  Management also reiterated its prior full-year outlook for a 20 to 40 bp decline in restaurant level margin, but provided 4Q10 guidance of 16% to 16.3%, which implies full year numbers will come in toward the lower end of the range.  Relative to fiscal 4Q09’s 18% restaurant margin, this guidance assumes that margins will decline 170 to 200 bps YOY, reversing the prior three quarters of margin growth despite the decline in top-line trends.  We have been saying that it was only a matter of time before gravity would set in. 

 

During the fourth quarter, management expects about 40 to 50 bps of YOY food and packaging cost favorability to be offset by sales deleveraging on both the labor and occupancy expense lines.  Food cost favorability has helped to stave off margin declines earlier in the year despite the significant demand headwinds with food and packaging costs as a percentage of sales declining 60 bps YOY in Q1, 140 bps in Q2 and 180 bps in Q3.  CKR will begin to lap this benefit in the first quarter of fiscal 2011, making it increasingly more difficult to hold the line on margins.  And as 4Q10 guidance makes clear, even with food costs providing a tailwind in the quarter, margins cannot continue to move higher with blended same-store sales  down 6%.

 

 

Howard Penney

Managing Director

 

CKR – TOPLINE TRENDS IMPAIRING MARGIN GROWTH - CKR margin vs SSS 4Q10E

 

CKR – TOPLINE TRENDS IMPAIRING MARGIN GROWTH - CKR Carl s Jr Period 13

 

CKR – TOPLINE TRENDS IMPAIRING MARGIN GROWTH - CKR Hardee s Period 13 SSS



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