There was an article in yesterday's New York Times... I quote, "Discounts Have Restaurants Eating Own Lunch." It did a good job describing how the price war among restaurant chains is eroding profit margins, angering franchisees and reinforcing the expectation among consumers that there will always be some kind of value deal or a coupon.

While the times talked about the conflict between casual dining joints, the war is much bigger than that...

And tonight, I want to talk about another front... the battle for the heart and soul for the burger eater...

On one side, you've got most fast-food chains practically giving away quarter pounders that seem to be interchangeable, at 99 cents a pop for some of these darned things... that's the smaller ones...

On the other side stands CKE Restaurants Inc. (CKR)... the company that runs Carl's Jr. or Hardee's, offering big beefy, artery clogging, and relatively-inexpensive burgers that I love the taste of, but I think should be eaten with a side of Lipitor, not fries...

Which burgers do consumers want, or can both be models of success?...   Those are the issues here...

Now I first recommend CKR as a speculative play back on May 22nd... The stock was at $7.73, just slightly more than the cost of one of their signature "thick" burgers. It's up 12.5% since then which, of course, is better than a sharp Bowie knife in the eye...

I said CKR worked as a turnaround play... as 87% of the company-operated Carl's Jr.s are located in California... one of the states that obviously been hardest hit by the recession... so is Oregon with the highest recession... isn't that strange? Anyway, giving it plenty of room to improve, and with 3,133 locations in 42 states and 14 countries, I also felt the company had room to expand before it saturated America with its saturated fat...

Over 3,000 locations may sound like a lot but, compared to other fast food joints, it's got plenty of space to grow.

Then, on June 2nd, we heard from Andy , the CEO of CKE Restaurants Inc. (CKR), that when I did a taste test to give to give the companies hamburgers a chance... and sure enough, they make a darn good burger... that none of it was definitive... although they did come up and we had an unbelievable good time...

Today, CKR reported its fiscal 1st quarter, giving us a real sense of how the burger war is going... CKR delivered earnings of 26 cents per share, versus a consensus of 25 cents, on sales of $446 million, versus the Street's consensus, $449 million... Despite a 4.2% decline in year-over-year sales, operating margin improved by 20 basis points...

So let's hear from Andy, the CEO of CKR again, to get a better sense of the quarter...

Jim:    Mr. Pudzer, welcome back to Mad Money...

Andy:     Great to be here Jim. Thank you.

Jim:    Alright, there was this line... I thought it was one of the greatest lines I've read in a press release in a long time. It says, "It has never been my goal to get excited over reporting flat earnings or margins, however, holding operating income in company-operated restaurant level margins steady in this economy, and doing so while facing the heavy discounting taking place in the fast food and casual dining sectors, as well as increased depreciation expense, due to our remodeling programs, is a testament to our management teams and the strength of our brands." Explain to people why just doing... just treading water... is a good thing.

Andy:     Well, we managed to maintain margins about 19.9% for first quarter at the restaurant level, and that's with absorbing depreciation that was increased becuase of our remodel program. Whereas, one of our competitors announced yesterday, and their margins were down 200 basis points. So it's a real job to maintain these kinds of margins when everybody's going after that 99 cent customer, where your margins are obviously very low. So we felt very good about that.

Jim:    You're telling me right here that you're sticking with that "thick burger" price?

Andy:     (laughs) We are sticking with the thick burger price. We do have lower-priced burgers, but we're not going to be going on TV promoting those, because everybody's doing that. You just end up fighting with every other brand...

Jim:    Right...

Andy:     We've got a new ad with Audrina Partridge and a big, thick, juicy Teriyaki burger and that's we're going...

Jim:    Alright, Carl's Jr... uh, for period five here, minus 7.5%... We can't be happy with that?...

Andy:     Well, we're never happy with negative sales, and that really is the entire focus of our management team, on ways to generate sales. This Audrina ad is part of that... But part of the difficulty that we're seeing now... and again, a competitor came out yesterday and said the same thing... we are rolling over the stimulus checks from last year which I think hurt everybody's trends (i.e., year-over-year)... but that's not an excuse for going full forward, and blast this out, digitial marketing... and do whatever it takes... We're going to get those sales back up...

Jim:    Okay, how about the breakfast? How is that going?

Andy:     It's going real well. We're testing Hardee's biscuits at Carl's Jr.... We're actually expanding that test because it's going well so far. The only real issue is, can we do it operationally. They serve about 50% hamburgers at Carl's at breakfast, so we want to make sure we can make the breakfast burgers and the biscuits... but so far so good... It looks real good. And we're actually coming out with Biscuit Holes at Hardee's this week, with some real good ads, to boost their breakfast sales as well. So breakfast is a great day part for us.

Jim:    So look, when I hear you talk about... you always talk about advertising on this show... and I always read everyday, including today, you know, TV... no one's watching TV... but you've seen good results when you do these campaigns, don't you?

Andy:     If you look at our press release that came out today for the new ad with Audrina Partridge, there is a link to our YouTube site... and, with it, I think we had 2-3 million hits on YouTube with these ads. So we do run a lot on TV... with TV, you do get the biggest bang for the buck, but digital is growing every day and it becomes increasingly important, so we're very focused on that as well.

Jim:    There was one line that I just thought was kind of confusing to me... I don't really understand what you did with these interest rate swaps that knocked your earnings down a couple of cents...

Andy:     How long is your show?...

Jim:    Oh, I was afraid... I know, I know...

Andy:     I'll give you the Reader's Digest version...

Jim:    I know. What I should have said was that you did have some financial issues that really did make your earnings not look as good as they really were, right?

Andy:     That's right, and they're... actually, our interest in the first quarter of this year that we paid is less than the interest we paid last year. Rates are down and we paid our debt down, however, there is a mark-to-market charge which requires us to take an expense this quarter. Last year, we got a benefit; this year, we get an expense, so it makes us look like we're paying less interest than we are, when we get a benefit, and more interest than we are when we take the expense but, over time, it comes out to zero. And I think it's much fairer to look at the numbers, not looking at expense, because it doesn't mean anything.

Jim:    Good, because if someone saw it... I like people to read the press releases, and the first thing they'd say is, wait a second, he engaged in something. It's not. Nothing is just... One last question: When you came here last time, it wasn't that long ago... Is there even the most infinitesimal improvement in California in the last five weeks?

Andy:     You know, unfortunately, I can't say that there is. The unemployment rate went to 11.5% from 11, and there was a big article in The L.A. Times last week about manufacturing jobs leaving the state. The legislature needs to get a grip on this, and become business friendly, and then things will turn. It's a great place to live. It's a wonderful state. We've got a great employment base, but we've got to be friendly to businesses, or they're just going to continue to leave the state.

Jim:    Amen. Totally agree. Andy Pudzer, CEO of CKE Restaurants Inc. (CKR). You delivered on a quarter where the other guys didn't. Congratulations.

Andy:     Thank you, Jim. Thank you very much.

Jim:    Okay... Guys look... It is difficult to get excited by a story when the numbers, or the comp sales, are down. The way you have to look at this is, what happens when things get better? Because he maintained his price point. Once you start cutting your prices, you never get them back. He's maintained it. I stick with my speculative buy. And, I've got to tell you again, the burgers are real good. This is no White Castle, partner!
 

[end of segment]

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