Operator Of Hardee’s and Carl’s Jr. Trades Sideways Following Questionable Earnings Beat

CKE Restaurants (CKR), the parent company of well-known fast-food chains Hardee’s and Carl’s Jr., reported significantly better-than-expected EPS numbers Wednesday after the bell, but shares are not responding well during after-hours trading due to shortfalls on revenue and operating profits.  The Carpinteria, CA-based company had attempted to cater to the higher end of the fast-food market, refusing to offer much in the way of discounts, in an attempt to preserve long-term brand equity.  The strategy appears to have gone over well at Hardee’s, which has out-performed many of its peers throughout the recession, but the same cannot be said for Carl’s Jr., which has been hit hard by California’s struggling economy.

For the Q ended January 31st, CKR reported earnings of $15.4 million, or $0.28/share, vs. $2.6 million, or $0.05/share, for the same quarter last year.  Consensus estimates called for EPS of $0.06/share on revenue of $312 million.  On the surface, this EPS beat of several hundred percent would seem a cause for celebration.  However, a narrow miss on revenue and a much wider one on operating profit seem to have put the EPS numbers in doubt.

CKR reported revenues of $311.7 million, down 4.8% year-over-year, and operating profits of $11.4 million, good for a 17% YOY drop.  Upon closer inspection, the inflated EPS numbers appear to be due to a large tax benefit, as well as a reduced interest expense.  The company did not provide any adjusted EPS numbers, which some on the Street believe would have significantly closed the gap between CKR’s results and analyst expectations.

Shares of CKR gapped up big-time on 2/26 and have remained relatively flat ever since.  Shares remained nearly unchanged as of the close of after-hours trading, as investors appear to be having a tough time getting a hold of what CKR’s adjusted EPS would have been.  I would recommend staying away from shares until we have more info, but in truth, with operating margins falling that much, I would stay away even upon receipt of greater clarity.  Look to more dependable fast-food operators like McDonald’s (MCD) or Chipotle (CMG) if you’re intent on having some exposure to the sector.

Disclosure: No holdings in CKR, MCD, CMG.

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