Chains outline strategies at investor briefing

Chains outline strategies at investor briefing

Richard Martin

LOS ANGELES–Although the messages and the styles differed in each case, the intent was largely the same here last month for each of the six southern California-based food-service companies who wooed the investment community in a two-day marathon of back-to-back briefings rare for the West Coast.

Stock brokers, security analysts and portfolio managers converged on the Los Angeles Hilton for a series of caucuses with the top brass of Hilton Hotels, Collins Foods, Sizzler, Naugles and Carl Karcher Enterprises, each trying to gain favor and add luster to their images.

For a full day beforehand, the analysts met in nearby La Mirada at Denny’s headquarters for a rundown on that company’s coffee shop, Winchell’s and El Pollo Loco operations, which yielded a 15% year-to-year gain in first-half net profit to $24.2 million for the six months ended Dec. 30.

Amidst all the touting of earnings and growth potentials, only Naugles found itself in a somewhat defensive posture, trying to turn apparent negatives into positives just days after closing 16% of its units and projecting third-quarter losss of more than $4 million.

“We were going to close 25 stores and hope for improvement on the other 10,” explained Naugles finance vp Wayne Withers, “but we said, ‘Let’s do this once so we never have to go back and do it again.'”

Naugles closed 35 unprofitable units (cutting back to 180) and said it would drastically slow its historically rapid expansion rate to no more than about 50 new stores over the next year and a half. Nor would it franchise any more of its 24-hour Mexican-American drive-thrus (a move it began only last year, in part presumably to impress many of the same stock brokers who were now hearing the company’s revised strategy).

Chairman and ceo Harold Butler said he had “always been against franchising,” adding that expanding through franchises “takes away from future profitability, and is just not good for the long-term benefit of the company.”

“in 1985, all earnings will come from operations, not franchise fees,” Butler added. Naugles’ net profit of $1.94 million for the first half ended Jan. 12–only a 2% year-to-year gain–barely surpassed franchise-fee revenue of $1.9 million during the same period.

Although Naugles expects to report a net loss of from $4 million to $4.5 million in the third quarter from charges related to store closures, the company would show a profit of $900,000 in the fourth quarter, Butler indicated, after excising all 35 of its unprofitable outlets.

Despite recent setbacks, the assembled investment mavens were reminded that Naugles remained the only “pure” vehicle for investment in an upscale Mexican fast-feeder having a national presence (Taco Bel being excluded since it comes under the umbrella of parent PepsiCo).

Naugles president and chief operating officer Mike Mooslin stressed his company would continue to exploit its price/value advantages, gained through its approach to being a “dinner-house on a paper plate.” Although Naugles’ food costs run about 20% higher than the fastfood average, its sales per square foot are in excess of $350 a year, a figure Mooslin thinks may be the highest in the industry.

A contrasting picture was painted by Donald Karcher, president by Carl Karcher Enterprises, which expects to expand its 360-unit Carl’s Jr. chain to 1,000 outlets from coast to coast by 1990–partly through franchising.

CKE has remained a rising star in the minds of many analysts for such innovations as being the nation’s first fast-food burger chain with salad bars (1977), the first with carpeted dining areas and the first (last year) with table service of steak, chicken and fish dinners on nondisposable plates with real knives and forks.

But with its incipient national expansion program getting under way, and concommitant capital expenditure increasing, some analysts forecast that CKE’s earnings profile–flattened out in the last two quarters–may stay that way over the short term. Keeping the investment community apprised of CKE’s long-range gameplan was among Donald Karcher’s and senior finance vp Loren Pannier’s principal missions at the Hilton confab.

Karcher called fourth-quarter earnings “disapppointing,” although he pointed out that revenues were up, and same-unit comparisons for stores open a year or more showed real sales growth of 5.5%, with average unit volume gains of 13%. (CKE’s net profit in the fourth quarter was $2.1 million on sales of $69.5 million, vs. $2.2 million on sales of $55.8 million in last year’s closing quarter.)

One impressive statistic Karcher offered was the apparent immediate maturity of new units opened during the last 12 months (with the company’s new Charbroiler Dinner program built in from the start). On an annualized basis, those units would each average $1.2 million in annual sales, compared to new-unit averages of $958,000 last year, and $792,000 in 1982.

Although the company’s $2 million startup investment for the Charbroiler program brought much attention from industry watchers, long-range viability is not yet assured. Dinners are only about 6% of all sales, and the company had to raise prices 5% to bring down food costs from the 40%-45% range to the 35%-40% range. Moreover, there is still some concern among observers that the program may become an illustration of the old fast-food axiom which holds that people won’t come for dinner where they’ve already been for lunch.

Another factor entered into that axiomatic equation with Karcher’s disclosure that a whole range of new breakfast items will be rolled out in the fall. Six new pastries, plus hot cakes and scrambled eggs, will be introduced, along with four new breakfast combo platters, including omelets (pressing the dinner plates and dishwashers into daytime duty).

Where Karcher’s philosophy differs from so many other executives in fast food is evident in his stated position that CKE was not focusing on gains in market share, but rather was “zeroing in” in predetermined target customers, presumably the baby-boomers with their enhanced spending power and more demanding tastes.

CKE’s new franchising strategy calls for initial units to open one at a time starting next year in Texas, principally in Austin and San Antonio (where they won’t be ignored, as they might amid all the competition in Dallas and Houston). Plans call for 15 franchise stores in 1985, with 30 more in ’86, and 50 more in ’87.

Projected new company-onwed units total about 40 this year (including 15 in a new market in Arizona), 50 more in ’85, then 60 more in ’86.

If the chain reaches 1,000 units in 1990, fulfilling expectations of founder, chairman and ceo Carl Karcher, only about 35% of its units would be franchised, brother Don said. While prospective single-unit and territorial franchisees are being screened, Karcher said the company would also consider owners of multiunit chains which could benefit from wholesale conversion to the Carl’s Jr. concept.

James Collins and Richard Bermingham got the chance to impart their perspective on the Collins KFC franchise stronghold and distribution outfit in the West, and the company’s majority-owned Sizzler Restaurants subsisiary, as well as both company’s newer concepts like Gino’s East and Emma’s Taco House.

Chairman Collins and president Bermingham told the good news from the KFC front: 105 KFC units owned in the Los Angeles market by Collins (out of a total of 285 units in Collins’ Los Angeles franchise “co-op”) had same-unit sales gains of from 18%-21% from year to year as a result of the KFC fresh biscuit program and remodels and offsets to add seating and drive-thru windows.

Just-compiled third-quarter results were disclosed for the company, KFC Corp.’s largest franchisee, showing a 23% increase in net profit to $3.5 million over last year’s third-quarter results. Quarterly revenues were up 30% over last year to $98.5 million. Nine-month results include a 24% gain in net profit over the same period last year to $11.8 million on an 18% increase in revenues of $290.9 million.

Sizzler trends were up too, with a 6% year-to-year increase in monthly average sales per unit in the month of January (to $78,400), with a 4.5% gain in per-person check average (to $6.28).

Earlier, Sizzler had reported a 30% gain in net profit for the nine months ended Jan. 31 to $5.46 million, on a 9% gain in revenue to $104.6 million.

The investment crowd was told Sizzler would expand to a total of 459 units by the end of this fiscal year later this month, then would add 14 company and 20 franchised stores next year, followed by 27 company and 30 franchised units in 1986.

Emma’s Taco House, a Sizzler operation, would open 17 units next year and 47 more in 1986. In Las Vegas, the first unit of Emma’s, a full-service Mexican concept, is showing a 50% gain in customer counts over the Sizzler it replaced, but is only averaging about $10,000 in weekly sales since opening in January. Sizzler business is up 100% in the former unit, now relocated to a new facility up the street

Collins Foods’ new concept, Gino’s East, is forecast to open six new units next year. Lease negotiations are now under way for at least two sites, including one in San Diego. Collins is expecting the Chicago-style deep-dish pizza concept to yield a 20.5% operating margin out of annual unit volumes projected to run $1.8 million.

The original Gino’s unit in Chicago does a weekly volume of from $74,000 to $100,000 under the management of Collins’ joint-venture partner in the Gino’s project, Lettuce Entertain You of Chicago.

Earlier, a breakfast meeting with Hilton Hotel executives had started things off on the second day of the marathon series of briefings. John Giovenco, Hilton executive financial vp, outlined the expansion objectives thta would igve the company an increased presence in Asia and Australia, and give it a belated entry into the Atlantic City gaming market.

High costs tied to the recession in Europe have influenced the direction of Hilton’s foreign thrust into the Pacific Basin, to be done primarily under the Conrad Internatinal banner (the company doesn’t own the Hilton International name overseas).

After adding some 8,000 rooms to the Hilton chain in 1982, and another 4,000 last year, the company has about 14,000 more rooms lined up for the next two years, of which about 85% would be in properties owned 100% by other companies.

Hilton’s movement away from ownership of the properties it operates could be advanced this year with announcement of several more sales, Giovenco said, citing the company’s intention to separate real estate holdings from its asset base.

Improving earnings is more important to a publicly held company like Hilton than was improving the company’s “wealth,” as would be done from taking the depreciation of owned properties rather than utilizing the liquidity gained by a low-ownership level management position.

Much of the $1 billion in capital improvements bugedted for 1985 would not represent major financial investments, but would come from off-balance-sheet financing of assets. Hilton would probably be more profitable if it were more highly leveraged, Giovenco said, but such was just “not within the nature of the company.”

Hilton’s Atlantic City hotel, 610 rooms costing $270 million, would open in May 1985. The company’s late start in the Atlantic City market has its roots in skepticism, “We frankly didn’t believe how strong gaming would be in Atlantic City,” Giovenco said. But, he added, “Unless gaming is legalized in New York, Atlantic City has a bright future.”

Casino expansions of existing New York properties would have been the company’s preferred tack, since Hilton has a “high concentration” of unleverage properties in that state.

“We didn’t want to put $270 million to risk if Atlantic City was going to be a two-year phenomenon,” Giovenco added, pointing out that the company had secured options on the land where it is now building, just in case.

Gaming is expected to continue making strong contributions to the Hilton bottom line, especially at the Hiltons in Las Vegas and in Reno, where the Hilton property made a sigficant turnaround last year, Giovenco said.

Hotel-casino properties helped lead Hilton’s profit surge last year, when the company reported net profit of $112.6 million, a 35% gain over 1982, on an 8% gain in revenue to $669.6 million.

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