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Hardee's Woes Prompt S&P to Downgrade CKE Debt

May 19, 2000|Dow Jones

Standard & Poor's lowered its ratings on CKE Restaurants Inc.'s debt Thursday, citing the survival struggle in the Anaheim company's Hardee's restaurant chain.

CKE, the fourth-largest quick-service hamburger chain in the U.S., operates 3,865 restaurants operating primarily under the Carl's Jr. and Hardee's brand names.

S&P said it is likely to take some time before the sales trend at the Hardee's chain turns positive, despite major efforts by CKE to revitalize it. The rating agency also cited a weakening of credit protection measures at the company.

Subordinated debt ratings on CKE Restaurants were lowered to B- from B. Corporate credit and bank loan ratings were reduced to B+ from BB-.

CKE took on significant business and financial risks when it acquired the Hardee's restaurant franchise from Imasco Holdings Inc. in 1997 and the 557 Hardee's units from Advantica Restaurant Group Inc. in 1998, S&P said, as the acquisitions tripled CKE's revenue and significantly increased the size of its total business.

CKE's management has implemented several plans to revitalize Hardee's, S&P said, but their execution has been difficult because of the size of the Hardee's chain, its poor image and the stiff competition in the restaurant industry.

Same-store sales declined 5% in fiscal 2000, 7.5% in fiscal 1999, and 7.2% in fiscal 1998. The sales weakness was largely contributed to the drop in Hardee's restaurant level operating margin to 9.7% in fiscal 2000, from 16.7% in fiscal 1999.

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