This summary is based on the second quarter fiscal 2008 earnings call conducted by CKE Restaurants Inc. (CKR: chart) on September 19, 2007.

President and Chief Executive Officer: Andy Puzder
Executive Vice President and Chief Financial Officer: Ted Abajian
VP, Investor Relations: John Beisler

Key Investors Issues

- The earnings per share dropped to 15 cents from 20 cents in the prior year.
- Quarterly revenue dropped 0.4% over the previous year to $363.1 million.
- The firm returned around $74 million to shareholders through share repurchases and cash dividends.

Second Quarter Fiscal 2008 Financial Highlights

Consolidated revenue for the second quarter was $363.1 million, a $1.3 million or 0.4% decrease from the prior year quarter.

The decrease in revenue reflects the impact of refranchising efforts, partially offset by same store sales growth and new unit development. The company faced significant cost pressures during the quarter, and on top of that it had a very unusual development with respect to a very old 1982 Workers Compensation Injury claim.

- Same-store sales increased 2% at Carl''s Jr. and 2.9% at Hardee''s company-operated restaurants, compared to the prior year quarter.
- Average unit volumes for the trailing thirteen periods increased to $1,481,000 and $934,000 at company-operated Carl''s Jr. and Hardee''s restaurants, respectively.
- Company-operated restaurants revenue for the quarter was $287.8 million, a 0.5% decrease from the prior year quarter. Both consolidated revenue and company-operated restaurants revenue comparisons have been negatively impacted by the refranchising of the Oklahoma Carl''s Jr. market during the prior year quarter and by the refranchising of 46 Hardee''s restaurants during the current fiscal year.

The operating income was $23.4 million, a $10.5 million decline from the prior year operating income of $33.9 million.

There were a handful of factors that caused the majority of the year-over-year decline in operating income.
- The food and packaging costs increased 130 basis points or approximately $3.7 million over the prior year quarter due to increased costs for beef, cheese, pork, oil products and soft drink syrups.
- The occupancy and other expenses increased by 110 basis points or approximately $3.1 million due primarily to higher rent and depreciation costs.
- The Workers Compensation expense increased 50 basis points or $1.4 million. The increase in Workers Compensations Costs is due to a $2.5 million charge that the firm was required to record to increase its self-insurance reserves for a 1982 injury claim. This charge was partially offset by a $1.1 million favorable adjustment to its reserves for all other self-insured workers compensation claims. The firm views this charge as an unusual event given that the claim occurred in 1982. If this claim had occurred within the past decade, it would have been covered by the current Workers Compensation Insurance program.
- The royalty revenue decreased by $1.8 million during the second quarter. This decrease is primarily due to the collection during the prior year quarter of $2 million of previously unrecognized royalties from delinquent franchisees.

The second quarter income from continuing operations was $11.7 million or 18 cents per share, versus $14.7 million or 21 cents per share in the prior year quarter.

During the quarter, the company’s operating expenses increased considerably.

Higher operating expenses, not only negatively impacted earnings, but they also masked the very tangible returns that the firm was earning at its capital plans. The management is not satisfied, particularly with its food cost expense. Higher beef cost, the impact of increased demand for bio-fuel alternatives and the decreased value of the dollar overseas, have put extreme pressures on food costs. Normally the firm would relieve these pressures by increasing its prices and it will do so over time. However, the company recently took pricing to offset the impact of significant increases in the minimum wage at both the State and Federal level. As such, it will need to phase in additional pricing increases so as to minimize the negative impact on sales. Nonetheless, there are other actions that it can take to address the food cost issue and operating expenses generally. The firm began taking such actions in the second quarter and will do so more aggressively during the remainder of the year.

At Carl’s Jr, restaurant operating costs increased by 380 basis points to 79.6% of company operated revenue. The increase in restaurant operating costs was driven by a 180 basis point increase in occupancy and other expense over the prior year quarter, due primarily to higher rent expense equaling 50 basis points and increased depreciation costs of 90 basis points. The increase in rent expense is primarily due to current quarter consumer price index and fair market value adjustments and the re-franchising of the Oklahoma market during the prior year quarter. The increase in depreciation expense is principally due to the roll-out of new point of sale software and related hardware, as well as increased remodel activity.

Food and packaging costs increased 50 basis points due to higher commodity prices for beef, cheese, pork, oil products and an increase in soft drink syrup prices. These increases approximately 100 basis points in the aggregate were partially offset by vendor credits of 50 basis points resulting from the recognition of an adjustment to the cost of previously purchased inventory. The firm does not expect this credit to recur in future periods.

Payroll and employee benefits expenses increased 150 basis points over the prior year quarter. The increase in labor and employee benefits cost is almost entirely due to the Workers Compensation Cost increase. In fact, the $2.5 million charge to increased reserves for the 1982 claim alone represents 180 basis points in the second quarter.

At Hardees, restaurant operating costs increased 220 basis points to 83.2% of company operated revenue. The increase in restaurant operating costs at Hardees was driven by a 200 basis point increase in food and packaging costs due to higher commodity prices for beef, pork, dairy and oil products and an increase in soft drink syrup prices. Hardees’s food and packaging costs increased by a larger amount than Carl’s Jr principally due to higher breakfast sales at Hardees which result in greater use of pork and dairy products, which both had big year-over-year increases. In addition, while both Carl’s Jr and Hardees realized solely on domestic beef for their Angus Burgers, the Carl’s Jr famous star patty include their combination of domestic and imported beef. The cost of domestic beef has increased more and been more volatile than imported beef causing Hardees’s beef costs to increase more overall than Carl’s Jr.

Occupancy and other expenses increased 30 basis point due to higher rent expense and increased costs related to the roll-out of new uniforms at Hardees.

Payroll employee benefit expense decreased 20 basis points over the prior year quarter, a favorable adjustment to workers compensation claim reserves and menu price increases, more than offset the impact of Federal and State minimum wage rate increases.

In the first half of 2008, the firm has spent $31.7 million on non-discretionary capital projects.