| CKE RESTAURANTS INC Item 1A Risk Factors We are engaged in a business strategy that includes the turnaround of our Hardee’s operations |
| The success of a business strategy, by its very nature, involves a significant number of risks, many of which are discussed below: Our success depends on our ability to judge the impact of competitive products and pricing |
| Successful operation of our restaurants requires the ability to identify the effects of product and pricing trends |
| If we are unable to evaluate the impact of product or pricing trends effectively, we may fail to implement strategies allowing us to capitalize on those trends, which may result in decreased sales or increased costs |
| Our success depends on our ability to compete with our competitors |
| The foodservice industry is intensely competitive with respect to the quality and value of food products offered, concept service, price, dining experience and location |
| We compete with major restaurant chains, some of which dominate the QSR segment |
| Our competitors also include a variety of mid-price, full-service casual-dining restaurants, health and nutrition-oriented restaurants, delicatessens and prepared food restaurants, as well as supermarkets and convenience stores |
| Many of our competitors have substantially greater brand recognition, as well as greater financial, marketing, operating and other resources than we have, which may give them competitive advantages |
| Our competitors could also make changes to pricing or other marketing strategies which may impact us detrimentally |
| As our competitors expand operations, we expect competition to intensify |
| Such increased competition could have a material adverse effect on our consolidated financial position and results of operations |
| We may be unable to remain competitive or grow because we are a leveraged company |
| We have a significant amount of indebtedness |
| As of January 31, 2006, we had a total of dlra264cmam662 of debt and capital lease obligations |
| This indebtedness requires us to dedicate a portion of our cash flow from operations to principal and interest payments on our indebtedness, which could prevent us from implementing growth plans or proceeding with operational improvement initiatives |
| Remodeling older restaurants is an effective way to stimulate sales |
| If we are required to divert cash flow from the remodeling of older restaurants or the opening of new restaurants to repayment of debt, we may be at a disadvantage compared to our competitors and our vulnerability to general adverse economic and industry conditions may be increased |
| As of January 31, 2006, we had dlra8cmam000 outstanding under the revolving portion and dlra98cmam749 outstanding under the term loan portion of our senior credit facility and dlra61cmam607 in outstanding letter of credit obligations |
| We face a series of maturity dates on our outstanding indebtedness that occur in close proximity to each other, beginning with the maturity of the revolving credit facility portion of our senior credit facility on May 1, 2007, the maturity of the term loan portion of our senior credit facility on July 2, 2008, and the requirement to repurchase our dlra105cmam000 of 4prca Convertible Notes Due 2023 at the option of the holders of the notes in October 2008 |
| Our leveraged status may prevent us from accessing credit or equity markets to satisfy our repayment obligations as they mature on favorable terms, or at all |
| 12 _________________________________________________________________ [69]Table of Contents Restrictive covenants in our credit facility and outstanding senior indebtedness could adversely affect our business |
| Our credit facility and our other outstanding senior indebtedness contain restrictive covenants and, in the case of our credit facility, requirements that we comply with certain financial ratios, including minimum Adjusted EBITDA targets |
| Certain of these covenants limit our ability to take various actions, including the incurrence of additional debt, the guaranteeing of indebtedness and engaging in various types of transactions, including mergers and sales of assets, and making specified distributions or other restricted payments, including investments |
| These covenants could have an adverse effect on our business by limiting our ability to take advantage of business opportunities |
| Failure to achieve minimum Adjusted EBITDA targets, to maintain financial ratios required by our credit facility or to comply with the covenants in our credit facility or our other indebtedness could also result in acceleration of our indebtedness, which would impair our liquidity and limit our ability to operate |
| Failure to continue our revitalization of Hardee’s would have a significant negative effect on our success |
| We have been challenged in our efforts to reestablish the connection between Hardee’s and consumers |
| Our efforts have included developing new marketing strategies, remodeling restaurants, refranchising restaurants, enhancing menu variety and focusing on the fundamentals of quality, service and cleanliness |
| Hardee’s performance has improved significantly; however, we believe Hardee’s remains an under-performing brand |
| Our success depends on our ability to attract and retain key personnel |
| We believe that our success will depend, in part, on the continuing services of our key management personnel |
| Additionally, our success may depend on our ability to attract and retain additional skilled management personnel |
| Our success depends on our franchisees’ participation in our strategy |
| Our franchisees are an integral part of our business |
| We may be unable to successfully implement our brand strategies if our franchisees do not actively participate in that implementation |
| The failure of our franchisees to focus on the fundamentals of restaurant operations, such as quality, service and cleanliness, would have a negative impact on our success |
| Our financial results are affected by the financial results of our franchisees |
| We receive royalties from our franchisees |
| Our financial results are somewhat contingent upon the operational and financial success of our franchisees, including implementation of our strategic plans, as well as their ability to secure adequate financing |
| If sales trends or economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on franchised restaurants |
| Additionally, refusal on the part of franchisees to renew their franchise agreements may result in decreased royalties |
| Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future |
| We may be unable to recover increased operating costs through price increases |
| The QSR segment historically has attracted consumers that are either lower income and/or pressed for time |
| An economic downturn that decreases our customers’ disposable incomes would have a negative impact on our sales and profitability |
| In addition, unfavorable macroeconomic trends or developments concerning factors such as increased food, labor and employee benefit costs and availability of experienced employees may also adversely affect our financial condition and results of operations |
| We may be unable to increase prices to match increased costs without further harming our sales |
| If we are unable to raise prices in order to recover increased costs for food, fuel, utilities, wages, clothing and equipment, our profitability will be negatively affected |
| 13 _________________________________________________________________ [70]Table of Contents We face commodity price and availability risks |
| We purchase energy and agricultural products that are subject to price volatility caused by weather, market conditions and other factors that are not predictable or within our control |
| Increases in commodity prices could result in higher restaurant operating costs for our restaurant concepts |
| Occasionally, the availability of commodities can be limited due to circumstances beyond our control |
| If we are unable to obtain such commodities, we may be unable to offer related products, which would have a negative impact on our profitability |
| We depend on our suppliers to deliver quality products to us timely |
| Our profitability is dependent on, among other things, our continuing ability to offer fresh, high-quality food at moderate prices |
| While we continue to operate our own distribution business for most of our Carl’s Jr |
| system, we rely upon independent distributors for our Hardee’s and La Salsa restaurants |
| Our Hardee’s restaurants depend on the distribution services of MBM, an independent supplier and distributor of food and other products |
| MBM is responsible for delivering food, paper and other products from our vendors to our Hardee’s restaurants on a regular basis |
| MBM also provides distribution services to a large number of our Hardee’s franchisees |
| We purchase most of the food, packaging and supplies used in our La Salsa restaurants from McCabe’s |
| We have distribution agreements with both McCabe’s, which services restaurants in California, Nevada and Arizona, and Sysco, which distributes to a small number of our franchise restaurants outside these states |
| The agreements with McCabe’s and Sysco expire on September 30, 2006 and August 31, 2008, respectively |
| In addition, our dependence on frequent deliveries of food and paper products subjects our restaurants to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients |
| Any disruption in these distribution services could have a material adverse effect on our consolidated financial position and results of operations |
| Adverse publicity regarding poultry or beef could negatively impact our business |
| Given the events regarding afflictions affecting livestock in various parts of the world, such as “avian flu” and “mad cow” disease, it is possible that the respective production and supply of US poultry or beef could be negatively impacted |
| A reduction in the supply of poultry or beef could have a material effect on the price at which we could obtain it |
| In addition, concerns regarding hormones, steroids and antibiotics may cause consumers to reduce or avoid consumption of poultry or beef |
| Failure to procure poultry or beef at reasonable terms and prices, or any reduction in consumption of poultry or beef by consumers, could have a material adverse effect on our consolidated financial condition and results of operations |
| Consumer preferences and perceptions may have significant effects on our business |
| Foodservice businesses are often affected by changes in consumer tastes and perceptions |
| Traffic patterns, demographics and the type, number and locations of competing restaurants may adversely affect the performance of individual restaurants |
| Multi-unit foodservice businesses such as ours can also be materially and adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns or operating issues stemming from one or a limited number of restaurants |
| Our operations are seasonal and heavily influenced by weather conditions |
| Weather, which is unpredictable, can adversely impact our sales |
| Harsh weather conditions that keep customers from dining out result in lost opportunities for our restaurants |
| A heavy snowstorm can leave an entire metropolitan area snowbound, resulting in a reduction in sales |
| Our first and fourth quarters, most notably the fourth quarter, include winter months when there is historically a lower level of sales |
| Because a significant portion of our restaurant operating costs is fixed or semi-fixed in nature, the loss of sales during these periods adversely impacts our profitability |
| These adverse, weather-driven events principally arise at our Hardee’s, and to a lesser extent, La Salsa restaurants |
| For these reasons, a quarter-to-quarter comparison may not be a good indication of our performance or how we may perform in the future |
| 14 _________________________________________________________________ [71]Table of Contents Our business may suffer due to our inability to hire and retain qualified personnel and due to higher labor costs |
| Given that our restaurant-level workforce requires large numbers of both entry-level and skilled employees, low levels of unemployment could compromise our ability to provide quality service in our restaurants |
| From time to time, we have had difficulty hiring and maintaining qualified restaurant management personnel |
| Increases in the minimum wage have impacted our labor costs |
| Due to the labor-intensive nature of our business, a continuing shortage of labor or increases in minimum wage levels could have a negative effect on our consolidated results of operations |
| Our sales and profits may be materially and adversely affected by our inability to integrate acquisitions successfully |
| Our future consolidated results of operations and cash flow may depend in part upon our ability to integrate any future acquisitions and mergers |
| If we are unable to achieve the strategic operating objectives we anticipate from any such acquisitions we may experience increased costs or decreased sales which would have a negative impact on our consolidated results from operations |
| Strategic operating initiatives that we may be unable to achieve include economies of scale in operations, cost reductions, sales increases and marketing initiatives |
| In the past we have been negatively affected by increases in both workers’ compensation insurance and general liability insurance and claims expense due to our claims experience and rising healthcare costs |
| Although we seek to manage our claims to prevent increases, such increases can occur unexpectedly and without regard to our efforts to limit them |
| If such increases occur, we may be unable to pass them along to the consumer through product price increases, resulting in decreased operating results |
| Our financial results may be impacted by our ability to select appropriate restaurant locations, construct new restaurants or complete remodels |
| In recent years, we have not opened a significant number of new restaurants, as available cash was used to repay indebtedness, repurchase common stock and, more recently, to pay dividends |
| Our strategic plan, and a component of our business strategy, includes the construction of new restaurants and the remodeling of existing restaurants |
| We and our franchisees face competition from other restaurant operators, retail chains, companies and developers for desirable site locations, which may adversely affect the cost, implementation and timing of our expansion plans |
| If we experience delays in the construction process we may be unable to complete such construction activities at the planned cost, which would adversely affect our future results from operations |
| Additionally, we cannot assure you that such remodels and conversions will increase the revenues generated by these restaurants or be sustainable |
| Likewise, we cannot be sure that the sites we select for new restaurants will result in restaurants whose sales results meet our expectations |
| The nature of our business exposes us to potential litigation |
| We have thousands of interactions or transactions each day with vendors, franchisees, customers, employees and others |
| We cannot be certain that we will prevail in every legal action brought against us |
| Governmental regulations may change and require us to incur substantial expenditures to comply |
| We are subject to governmental regulation at the federal, state and local level in many areas of our business, such as food safety and sanitation, the sale of alcoholic beverages, environmental issues and minimum wage |
| Governmental entities may change regulations that may require us to incur substantial cost increases in order to comply with such laws and regulations |
| While we endeavor to comply with all applicable laws and regulations, we cannot assure you that we are in full compliance with all laws and regulations at all times or that we will be able to comply with any future laws or regulations |
| If we fail to comply with applicable 15 _________________________________________________________________ [72]Table of Contents laws and regulations, we may be subject to sanctions or civil remedies, including fines and injunctions |
| The cost of compliance or the consequences of non-compliance could have a material adverse effect on our business and consolidated results of operations |
| Compliance with environmental laws may affect our financial condition |
| We are subject to various federal, state and local environmental laws |
| These laws govern discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes |
| These laws may also impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials |
| We may be responsible for environmental conditions or contamination relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurant or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant |
| The costs of any cleanup could be significant and have a material adverse effect on our consolidated financial position and results of operations |
| Provisions of our Certificate of Incorporation and Bylaws and our Stockholder Rights Plan could limit the ability of our stockholders to effect a change in control |
| Our certificate of incorporation and bylaws include several provisions and features intended to render more difficult certain unsolicited or hostile attempts to acquire our business |
| In addition, our Board of Directors has the authority, without further action by our stockholders, to issue up to 5cmam000cmam000 shares of preferred stock in one or more series, and to fix the rights, preferences and restrictions of such preferred stock |
| During fiscal 2006, our Board of Directors approved the adoption of a Stockholder Rights Plan (“Rights Plan”) and declared a dividend distribution of one right (a “Right”) for each outstanding share of our common stock to stockholders of record at the close of business on October 17, 2005 |
| In addition, one Right will be delivered with each share of common stock that is issued after October 17, 2005 |
| The Rights, which are initially attached to and will trade with our common stock, become exercisable, and will begin to trade separately, in the event that a tender offer for at least 15prca of our common stock is announced, or a person acquires or obtains the right to acquire at least 15prca of our common stock |
| If our stockholders have not approved the Rights Plan by December 31, 2006, then the Rights Plan will terminate and the Rights will expire as of that date |
| These provisions may discourage a third party from attempting to acquire control of us and could limit the price that investors might be willing to pay in the future for shares of our common stock |
| We face risks related to interest rates |
| Our principal exposure to financial market risks is the impact that interest rate changes could have on our senior credit facility, the magnitude of which depends on the amount of borrowings we have outstanding |
| As of January 31, 2006, we had dlra8cmam000 in borrowings outstanding under our revolving credit facility that bore interest at Prime plus an applicable margin, or 8dtta25prca |
| As of January 31, 2006, we also had dlra98cmam749 outstanding under the term loan portion of our credit facility, which bore interest at LIBOR plus an applicable margin, or 6dtta50prca, and dlra61cmam607 in outstanding letter of credit obligations, which bore fees at 2dtta25prca |
| Our financial results may be impacted by changes in accounting policies and practices |
| As of the end of the first quarter of fiscal 2005, we began to include in our Consolidated Financial Statements the operations of one of our Hardee’s franchisees, the Hardee’s National Advertising Fund and approximately 82 Hardee’s local advertising cooperative funds as a result of the adoption of Financial Accounting Standards Board (“FASB”) Interpretation 46R, Consolidation of Variable Interest Entities — an Interpretation of ARB Nodtta 51 |
| As of the beginning of fiscal 2007, we will be required to adopt the provisions of Statement of Financial Accounting Standards (“SFAS”) 123 (revised 2004), Share-Based Payment, which will require us to 16 _________________________________________________________________ [73]Table of Contents measure and record compensation cost for all share-based payments, including employee stock options, at fair value |
| Additional future changes to accounting principles generally accepted in the US may materially adversely affect our consolidated financial position and results of operations if we are required to change our methods of accounting for transactions |