10-Q 1 cke-11052012x10q.htm 10-Q CKE-11.05.2012-10Q



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 5, 2012
 
    
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________.

Commission file number 1-11313 and 333-169977


CKE RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
33-0602639
(State or other jurisdiction
 
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
 
 
 
 
6307 Carpinteria Avenue, Ste. A,
Carpinteria, California
 
93013
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (805) 745-7500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes o No þ Explanatory Note: While the registrant is not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, it has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of outstanding shares of the registrant’s common stock was 100 shares as of December 7, 2012.




CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX



2



PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and par values)
(Unaudited)

 
November 5, 2012
 
January 31, 2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
139,723

 
$
64,555

Accounts receivable, net of allowance for doubtful accounts of $62 as of November 5, 2012 and $38 as of January 31, 2012
21,836

 
24,099

Related party trade receivables
389

 
252

Inventories
14,217

 
16,144

Prepaid expenses
14,922

 
15,897

Advertising fund assets, restricted
23,214

 
18,407

Deferred income tax assets, net
24,023

 
25,140

Other current assets
3,922

 
3,695

Total current assets
242,246

 
168,189

Property and equipment, net of accumulated depreciation and amortization of $173,459 as of November 5, 2012 and $117,010 as of January 31, 2012
623,962

 
645,552

Goodwill
208,923

 
208,885

Intangible assets, net of accumulated amortization of $30,327 as of November 5, 2012 and $21,245 as of January 31, 2012
421,684

 
433,139

Other assets, net
26,487

 
24,373

Total assets
$
1,523,302

 
$
1,480,138

 
 
 
 
LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
4

 
$
3

Current portion of capital lease obligations
8,034

 
7,988

Accounts payable
33,040

 
40,790

Advertising fund liabilities
23,214

 
18,407

Other current liabilities
122,043

 
85,169

Total current liabilities
186,335

 
152,357

Long-term debt, less current portion
465,297

 
523,638

Capital lease obligations, less current portion
30,535

 
34,981

Deferred income tax liabilities, net
138,360

 
156,656

Other long-term liabilities
282,798

 
197,767

Total liabilities
1,103,325

 
1,065,399

 
 
 
 
Commitments and contingencies (Notes 4, 5, 7 and 13)


 


 
 
 
 
Stockholder’s equity:
 
 
 
Common stock, $0.01 par value; 100 shares authorized, issued and outstanding as of November 5, 2012 and January 31, 2012

 

Additional paid-in capital
460,797

 
457,252

Investment in CKE Inc. Toggle Notes
(8,362
)
 
(8,362
)
Accumulated deficit
(32,458
)
 
(34,151
)
Total stockholder’s equity
419,977

 
414,739

Total liabilities and stockholder’s equity
$
1,523,302

 
$
1,480,138


See Accompanying Notes to Condensed Consolidated Financial Statements

3



CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)

 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Revenue:
 
 
 
 
 
 
 
Company-operated restaurants
$
268,588

 
$
256,976

 
$
900,788

 
$
871,571

Franchised restaurants and other
42,211

 
35,643

 
130,969

 
121,360

Total revenue
310,799

 
292,619

 
1,031,757

 
992,931

Operating costs and expenses:
 
 
 
 
 
 
 
Restaurant operating costs:
 
 
 
 
 
 
 
Food and packaging
80,310

 
78,763

 
268,925

 
267,896

Payroll and other employee benefits
75,659

 
72,485

 
254,657

 
249,458

Occupancy and other
61,324

 
62,926

 
204,801

 
209,002

Total restaurant operating costs
217,293

 
214,174

 
728,383

 
726,356

Franchised restaurants and other
21,564

 
17,907

 
66,047

 
62,225

Advertising
15,582

 
15,698

 
52,450

 
51,158

General and administrative
30,800

 
30,570

 
102,288

 
100,876

Facility action charges, net
102

 
262

 
2,532

 
703

Other operating expenses

 

 

 
545

Total operating costs and expenses
285,341

 
278,611

 
951,700

 
941,863

Operating income
25,458

 
14,008

 
80,057

 
51,068

Interest expense
(17,381
)
 
(17,415
)
 
(59,014
)
 
(59,626
)
Other income (expense), net
430

 
(252
)
 
(1,600
)
 
(1,668
)
Income (loss) before income taxes
8,507

 
(3,659
)
 
19,443

 
(10,226
)
Income tax expense (benefit)
3,691

 
(2,142
)
 
3,350

 
(3,877
)
Net income (loss)
$
4,816

 
$
(1,517
)
 
$
16,093

 
$
(6,349
)

See Accompanying Notes to Condensed Consolidated Financial Statements

4



CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
Cash flows from operating activities:
 
 
 
Net income (loss)
$
16,093

 
$
(6,349
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
60,954

 
62,873

Amortization of deferred financing costs and discount on notes
3,215

 
3,065

Loss on early extinguishment of senior secured second lien notes
3,695

 
2,927

Share-based compensation expense
3,545

 
3,531

Provision for losses on accounts and notes receivable
29

 
114

Loss on disposal of property and equipment
713

 
863

Deferred income taxes
(17,179
)
 
(151
)
Other non-cash charges
2,122

 
729

Net changes in operating assets and liabilities:
 
 
 
Receivables, inventories, prepaid expenses and other current and non-current assets
3,882

 
(3,739
)
Estimated liability for closed restaurants and estimated liability for self-insurance
396

 
(909
)
Accounts payable and other current and long-term liabilities
36,676

 
28,043

Net cash provided by operating activities
114,141

 
90,997

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(39,357
)
 
(44,440
)
Proceeds from sale of property and equipment
1,925

 
1,749

Collections of non-trade notes receivable
841

 
703

Acquisition of restaurants, net of cash received
(75
)
 

Other investing activities
177

 
146

Net cash used in investing activities
(36,489
)
 
(41,842
)
Cash flows from financing activities:
 
 
 
Net change in bank overdraft
(5,802
)
 
(6,767
)
Proceeds from financing method sale-leaseback transactions
91,063

 
43,159

Payment of deferred financing costs
(5,219
)
 
(2,506
)
Payment for early extinguishment of senior secured second lien notes
(61,811
)
 
(49,370
)
Repayments of other long-term debt
(3
)
 
(614
)
Repayments of capital lease obligations
(6,312
)
 
(6,206
)
Purchase of Toggle Notes

 
(8,362
)
Dividends paid on common stock
(14,400
)
 

Net cash used in financing activities
(2,484
)
 
(30,666
)
Net increase in cash and cash equivalents
75,168

 
18,489

Cash and cash equivalents at beginning of period
64,555

 
42,586

Cash and cash equivalents at end of period
$
139,723

 
$
61,075


See Accompanying Notes to Condensed Consolidated Financial Statements


5



CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Description of Business

CKE Restaurants, Inc. (“CKE Restaurants”), through its wholly-owned subsidiaries, owns, operates and franchises the Carl’s Jr.®, Hardee’s®, Green Burrito® and Red Burrito® concepts. References to CKE Restaurants and its consolidated subsidiaries (the “Company”) throughout these Notes to Condensed Consolidated Financial Statements are made using the first person notations of “we,” “us” and “our.”

Domestic Carl’s Jr. restaurants are predominately located in the Western United States, primarily in California, with a growing presence in Texas. International Carl’s Jr. restaurants are located primarily in Mexico, with a growing presence in the rest of Latin America, Russia and Asia. Hardee’s restaurants are primarily located throughout the Southeastern and Midwestern United States, with a growing international presence in the Middle East and Central Asia. Green Burrito restaurants are primarily located in dual-branded Carl’s Jr. restaurants. The Red Burrito concept is located in dual-branded Hardee’s restaurants. As of November 5, 2012, our system-wide restaurant portfolio consisted of:

 
Carl’s Jr.
 
Hardee’s
 
Other
 
Total
Company-operated
423

 
470

 

 
893

Domestic franchised
700

 
1,230

 
7

 
1,937

International franchised
226

 
236

 

 
462

Total
1,349

 
1,936

 
7

 
3,292


As of November 5, 2012, 264 of our 423 company-operated Carl’s Jr. restaurants were dual-branded with Green Burrito and 265 of our 470 company-operated Hardee’s restaurants were dual-branded with Red Burrito.

Basis of Presentation and Fiscal Year

Our accompanying unaudited Condensed Consolidated Financial Statements include the accounts of CKE Restaurants, its consolidated subsidiaries and its consolidated variable interest entities (“VIEs”). These unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X. CKE Restaurants does not have any non-controlling interests in other entities. These financial statements should be read in conjunction with the audited Consolidated Financial Statements presented in our Annual Report on Form
10-K for the fiscal year ended January 31, 2012. In our opinion, all adjustments considered necessary for a fair presentation of financial position and results of operations for this interim period have been included. The results of operations for such interim period are not necessarily indicative of results for the full year or for any future period.

We operate on a retail accounting calendar. Our fiscal year ends on the last Monday in January and typically has 13 four-week accounting periods. For clarity of presentation, we generally label all fiscal year ends as if the fiscal year ended January 31. Accordingly, the fiscal year ended January 30, 2012 is referred to herein as the fiscal year ended January 31, 2012 or fiscal 2012, and the fiscal year ending January 28, 2013 is referred to herein as the fiscal year ending January 31, 2013 or fiscal 2013. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters generally have three periods, or 12 weeks.

Our restaurant sales, and therefore our profitability, are subject to seasonal fluctuations and are traditionally higher during the spring and summer months because of factors such as increased travel during school vacations and improved weather conditions, which affect the public’s dining habits.

Certain prior year amounts in these unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current year presentation.


6


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

Variable Interest Entities

We consolidate one national and approximately 80 local co-operative advertising funds (the “Hardee’s Funds”) as we have concluded that they are VIEs for which we are the primary beneficiary. We have included $23,214 and $18,407 of advertising fund assets, restricted, and advertising fund liabilities in our accompanying unaudited Condensed Consolidated Balance Sheets as of November 5, 2012 and January 31, 2012, respectively. Consolidation of the Hardee’s Funds had no impact on our accompanying unaudited Condensed Consolidated Statements of Operations and Cash Flows. We have no rights to the assets, nor do we have any obligation with respect to the liabilities, of the Hardee’s Funds, and none of our assets serve as collateral for the creditors of these VIEs.

NOTE 2 —ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED AND ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

In September 2011, the FASB updated its guidance on the annual testing of goodwill for impairment to allow companies to first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. If an entity determines, based on qualitative factors, that it is not more likely than not that a reporting unit’s fair value is less than its carrying amount, then it is not required to perform the quantitative two-step goodwill impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The provisions of this guidance became applicable to CKE Restaurants during the first quarter of fiscal 2013. The adoption of this guidance has not had, and is not expected to have, a material impact on our Condensed Consolidated Financial Statements.

In July 2012, the FASB updated its guidance on impairment testing for indefinite-lived intangible assets by allowing an entity to first perform a qualitative impairment assessment before proceeding to a quantitative impairment test. If an entity determines, based on qualitative factors, that it is not more likely than not that an indefinite-lived intangible asset is impaired, then it is not required to perform a quantitative impairment test. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our Condensed Consolidated Financial Statements.
  
NOTE 3 — PURCHASE OF ASSETS

During the forty weeks ended November 5, 2012, we purchased one Hardee’s restaurant from a franchisee for aggregate purchase price consideration of $75, and recorded property and equipment (including capital lease assets) of $54 and capital lease obligations of $17, resulting in $38 of additional goodwill in our Hardee's operating segment.

During the forty weeks ended November 7, 2011, we purchased three Hardee’s restaurants from a franchisee for aggregate purchase price consideration of $1,500, which was reduced by the settlement of certain pre-existing liabilities, resulting in net purchase price consideration of $1,207. As a result of this transaction, we recorded property and equipment (including capital lease assets) of $109, identifiable intangible assets of $85 and capital lease obligations of $55, resulting in $1,068 of additional goodwill in our Hardee’s operating segment.

NOTE 4 — INDEBTEDNESS AND INTEREST EXPENSE

Our senior secured revolving credit facility (the “Credit Facility”) provides for senior secured revolving facility loans, swingline loans and letters of credit in an aggregate amount of up to $100,000. As of November 5, 2012, we had no outstanding loan borrowings, $30,603 of outstanding letters of credit and remaining availability of $69,397 on our Credit Facility. Borrowings under the Credit Facility bear interest at a rate equal to, at our option, either: (1) the higher of Morgan Stanley’s “prime rate” plus 2.75% or the federal funds rate, as defined in our Credit Facility, plus 3.25%, or (2) the London Interbank Offered Rate (“LIBOR”) plus 3.75%.

The terms of our Credit Facility include financial performance covenants, which include a maximum secured leverage ratio and a minimum interest coverage ratio. As of November 5, 2012, our financial performance covenants did not limit our ability to draw on the remaining availability of $69,397 under our Credit Facility.


7


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

On July 16, 2012, we redeemed $60,000 of the principal amount of our senior secured second lien notes (the "Senior Secured Notes") at a redemption price of 103% of the principal amount of the Senior Secured Notes pursuant to the terms of the indenture governing the Senior Secured Notes. During the forty weeks ended November 5, 2012, we recognized a loss of $3,695 on the early extinguishment of the Senior Secured Notes. Subsequent to the redemption, and as of November 5, 2012, the remaining aggregate principal amount of the Senior Secured Notes was $472,122. As of November 5, 2012, the carrying value of the Senior Secured Notes was $464,914, which is presented net of the remaining unamortized portion of the original issue discount of $7,208 in our accompanying unaudited Condensed Consolidated Balance Sheet. The Senior Secured Notes bear interest at a rate of 11.375% per annum, payable semi-annually in arrears on January 15 and July 15.

On July 15, 2011, we redeemed $40,000 of the principal amount of our Senior Secured Notes at a price equal to 103% of the principal amount of the Senior Secured Notes. Additionally, on October 4, 2011, we purchased $8,170 of the principal amount of our Senior Secured Notes at a price equal to 100% of the principal amount of the Senior Secured Notes in an open market transaction. As a result of these transactions, during the twelve and forty weeks ended November 7, 2011, we recognized losses of $286 and $2,927, respectively, on the early extinguishment of our Senior Secured Notes.

In accordance with the indenture governing the Senior Secured Notes, we may be required to make offers to repurchase our Senior Secured Notes with a portion of the net proceeds received from sale-leaseback transactions. Pursuant to these requirements, on July 18, 2012, we commenced a tender offer to purchase up to $29,875 of the principal amount of our Senior Secured Notes (the “Tender Offer”) at a redemption price of 103%. The Tender Offer expired on August 16, 2012 with no Senior Secured Notes tendered.

Each of our wholly-owned domestic subsidiaries that guarantees indebtedness under the Credit Facility also guarantees the performance and punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all our obligations under the Senior Secured Notes. Separate financial statements and other disclosures of each of the guarantors are not presented because: (i) CKE Restaurants, Inc. is a holding company with no material independent assets or operations; (ii) the guarantor subsidiaries are, directly or indirectly, wholly-owned subsidiaries of CKE Restaurants, Inc.; (iii) such guarantees are full, unconditional and joint and several; (iv) the aggregate assets, liabilities, earnings and equity of the guarantor subsidiaries are substantially equivalent to the assets, liabilities, earnings and equity of CKE Restaurants, Inc. on a consolidated basis; (v) our non-guarantor subsidiaries are minor; and (vi) there are no significant restrictions on the ability of CKE Restaurants, Inc. or any of the guarantors to obtain funds from its respective subsidiaries by dividend or loan.

Interest Expense

Interest expense consisted of the following:

 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Senior secured revolving credit facility
$

 
$

 
$

 
$

Senior secured second lien notes
12,259

 
14,462

 
44,280

 
50,936

Amortization of deferred financing costs and discount on notes
937

 
896

 
3,215

 
3,065

Capital lease obligations
956

 
1,084

 
3,179

 
3,663

Financing method sale-leaseback transactions(1)
2,899

 
642

 
7,230

 
743

Letter of credit fees and other
330

 
331

 
1,110

 
1,219

 
$
17,381

 
$
17,415

 
$
59,014

 
$
59,626

___________
(1)
See Note 5.


8


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

As of November 5, 2012 and January 31, 2012, accrued interest was $16,669 and $2,650, respectively, which is included in other current liabilities in our accompanying unaudited Condensed Consolidated Balance Sheets.

CKE Inc. Senior Unsecured PIK Toggle Notes

During fiscal 2012, CKE Inc. (formerly known as CKE Holdings, Inc.), our parent, issued $200,000 aggregate principal amount of senior unsecured PIK toggle notes (the “Toggle Notes”). We have not guaranteed the Toggle Notes, nor have we pledged any of our assets or stock as collateral for the Toggle Notes. As a result, we have not reflected the Toggle Notes in our unaudited Condensed Consolidated Financial Statements.

The interest on the Toggle Notes, which is payable semi-annually on March 15 and September 15 of each year, can be paid (1) entirely in cash, at a rate of 10.50% (“Cash Interest”), (2) entirely by increasing the principal amount of the note or by issuing new notes for the entire amount of the interest payment, at a rate per annum equal to the cash interest rate of 10.50% plus 0.75% (“PIK Interest”) or (3) with a 25%/75%, 50%/50% or 75%/25% combination of Cash Interest and PIK Interest. CKE Inc. paid the March 15, 2012 and September 15, 2012 interest payments entirely in PIK Interest and has elected to pay the March 15, 2013 interest payment entirely in Cash Interest. A portion of the cash dividend paid by CKE Restaurants, Inc. to CKE Inc. during the forty weeks ended November 5, 2012 is expected to be used by CKE Inc. to make the Cash Interest payment on the Toggle Notes when due on March 15, 2013 (see Note 8).

As of November 5, 2012, the principal amount of CKE Inc.’s total long-term debt on a stand-alone basis was $235,754, which includes PIK Interest payments that have been added to the principal amount of the Toggle Notes. The principal amount of CKE Inc.’s long-term debt on a stand-alone basis has not been reduced by the $11,099 principal amount of Toggle Notes held by CKE Restaurants as of November 5, 2012 (the “Purchased Toggle Notes”) since the Purchased Toggle Notes remain outstanding. As of November 5, 2012, the carrying value of CKE Inc.’s total long-term debt on a stand-alone basis, including the current portion and the Purchased Toggle Notes, was $232,791, which is presented net of the unamortized portion of the original issue discount of $2,963.

NOTE 5 — SALE-LEASEBACK TRANSACTIONS

During the forty weeks ended November 5, 2012, we entered into agreements with independent third parties under which we sold and leased back 2 Carl’s Jr. and 60 Hardee’s restaurant properties. The initial minimum lease terms are 20 years, and the leases include renewal options and right of first offer provisions that, for accounting purposes, constitute continuing involvement with the associated restaurant properties. Due to this continuing involvement, these sale-leaseback transactions are accounted for under the financing method, rather than as completed sales. Under the financing method, we include the sales proceeds received in other long-term liabilities until our continuing involvement with the properties is terminated, report the associated property as owned assets, continue to depreciate the assets over their remaining useful lives, and record the rental payments as interest expense. Closing costs and other fees related to these sale-leaseback transactions are recorded as deferred financing costs and amortized to interest expense over the initial minimum lease term. When and if our continuing involvement with a property terminates and the sale of that property is recognized for accounting purposes, we expect to record a gain equal to the excess of the proceeds received over the remaining net book value of the associated restaurant property and any unamortized deferred financing costs.

During the forty weeks ended November 5, 2012, we received proceeds of $91,063 and capitalized deferred financing costs of $5,210 in connection with 62 financing method sale-leaseback transactions. During the forty weeks ended November 7, 2011, we received proceeds of $43,159 and capitalized deferred financing costs of $2,457 in connection with 29 financing method sale-leaseback transactions.


9


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

The cumulative proceeds received in connection with financing method sale-leaseback transactions of $158,517 and $67,454 are included in other long-term liabilities in our accompanying unaudited Condensed Consolidated Balance Sheets as of November 5, 2012 and January 31, 2012, respectively. The net book value of the associated assets, which is included in property and equipment, net of accumulated depreciation and amortization in our accompanying unaudited Condensed Consolidated Balance Sheets, was $112,714 and $48,722 as of November 5, 2012 and January 31, 2012, respectively. With respect to the financing method sale-leaseback transactions, our future minimum cash obligations as of November 5, 2012 are $2,893, $11,571, $11,571, $11,571, $11,744, $12,469 and $198,865 for the period from November 6, 2012 through January 31, 2013, for fiscal 2014, 2015, 2016, 2017, 2018 and thereafter, respectively.

NOTE 6 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents information on our financial instruments as of:

 
November 5, 2012
 
January 31, 2012
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
139,723

 
$
139,723

 
$
64,555

 
$
64,555

Notes receivable

 
118

 
1,696

 
2,050

Financial liabilities:
 
 
 
 
 
 
 
Bank indebtedness and other long-term debt, including current portion
465,301

 
548,049

 
523,641

 
599,027


The fair value of cash and cash equivalents approximates its carrying amount due to its short maturity. The estimated fair value of notes receivable was determined by discounting future cash flows using current rates at which similar loans might be made to borrowers with similar credit ratings. The estimated fair value of the Senior Secured Notes was determined by using estimated market prices of our outstanding Senior Secured Notes. For all other long-term debt, the estimated fair value was determined by discounting future cash flows using rates currently available to us for debt with similar terms and remaining maturities.

Our non-financial assets, which include long-lived assets, including goodwill, intangible assets and property and equipment, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment. When impairment has occurred, such long‑lived assets are written down to fair value.

During the forty weeks ended November 5, 2012, we determined that the assets at two underperforming company-operated Carl's Jr. restaurants were impaired. As a result, property and equipment with a carrying value of $1,265 was written down to fair value, resulting in impairment charges of $1,195. Additionally, during the forty weeks ended November 5, 2012, we determined that a property leased to a Hardee's franchisee was impaired due to a highway project that will eliminate direct access to the property, rendering it unfit for retail purposes. As a result, property and equipment with a carrying value of $1,250 was written down to fair value, resulting in an impairment charge of $1,204. We impaired each of the assets down to their respective fair values using measurements with significant unobservable inputs (Level 3). These fair value estimates are based on the assumption of the highest and best use of the asset group, or individual asset, and generally include estimates of future cash flows, assumptions of future same-store sales, projected operating expenses, and/or broker estimates of value, when readily available or determinable. These impairment charges were recorded to facility action charges, net in our accompanying unaudited Condensed Consolidated Statements of Operations (see Note 10).


10


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

NOTE 7 — COMMITMENTS AND CONTINGENT LIABILITIES

Lease Commitments

Under various refranchising programs, we have sold restaurants to franchisees, some of which were on leased sites. We entered into sublease agreements with these franchisees but remained principally liable for the lease obligations. We account for the sublease payments received as franchising rental income in franchised restaurants and other revenue, and the payments on the leases as rental expense in franchised restaurants and other expense, in our accompanying unaudited Condensed Consolidated Statements of Operations. As of November 5, 2012, the present value of the lease obligations under the remaining master leases’ primary terms is $121,810. Franchisees may, from time to time, experience financial hardship and may cease payment on their sublease obligations to us. The present value of the exposure to us from franchisees characterized as under financial hardship is $1,370.

Letters of Credit

Pursuant to our Credit Facility, we may borrow up to $100,000 for senior secured revolving facility loans, swingline loans and letters of credit (see Note 4). We have several standby letters of credit outstanding under our Credit Facility, which primarily secure our potential workers’ compensation, general and auto liability obligations. We are required to provide letters of credit each year, or set aside a comparable amount of cash or investment securities in a trust account, based on our existing claims experience. As of November 5, 2012, we had outstanding letters of credit of $30,603, expiring at various dates through August 2013.

Unconditional Purchase Obligations

As of November 5, 2012, we had unconditional purchase obligations in the amount of $77,177, which consisted primarily of contracts for goods and services related to restaurant operations and contractual commitments for marketing and sponsorship arrangements.

Employment Agreements

We have entered into employment agreements with certain key executives (the “Employment Agreements”). Pursuant to the terms of the Employment Agreements, each executive is entitled to receive certain retention bonus payments that will be paid out in October 2013, in accordance with such executive’s Employment Agreement. In addition, each executive will be entitled to payments that may be triggered by the termination of employment under certain circumstances, as set forth in each Employment Agreement. If certain provisions are triggered, our Chief Executive Officer shall be entitled to receive an amount equal to his minimum base salary multiplied by six and our President and Chief Legal Officer and our Chief Financial Officer shall each be entitled to receive an amount equal to his respective minimum base salary multiplied by three plus a pro-rata portion of his then-current year bonus. The affected executive may also be entitled to receive his unpaid retention bonus. If all payment provisions of the Employment Agreements had been triggered as of November 5, 2012, we would have been required to make cash payments of approximately $13,378.

Litigation

We are currently involved in legal disputes related to employment claims, real estate claims and other business disputes. With respect to employment matters, our most significant legal disputes relate to employee meal and rest break disputes, and wage and hour disputes. Several potential class action lawsuits have been filed in the State of California, regarding such employment matters, each of which is seeking injunctive relief and monetary compensation on behalf of current and former employees. The Company intends to vigorously defend against all claims in these lawsuits; however, we are presently unable to predict the ultimate outcome of these actions.


11


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

As of November 5, 2012, our accrued liability for litigation contingencies with a probable likelihood of loss was $2,514, with an expected range of losses from $2,514 to $5,564. As of November 5, 2012, we estimated the contingent liability of those losses related to litigation claims that are not accrued, but that we believe are reasonably possible to result in an adverse outcome and for which a range of loss can be reasonably estimated, to be in the range of $2,085 to $10,860. In addition, we are involved in legal matters where the likelihood of loss has been judged to be reasonably possible, but for which a range of the potential loss cannot be reasonably estimated based on current facts and circumstances.

NOTE 8 — STOCKHOLDER'S EQUITY

During the forty weeks ended November 5, 2012, we declared and paid a cash dividend of $14,400 to CKE Inc. No dividends were declared or paid during the forty weeks ended November 7, 2011.

NOTE 9 — SHARE-BASED COMPENSATION

Total share-based compensation expense was as follows:

 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Share-based compensation expense related to Units that contain performance conditions
$

 
$
555

 
$
1,295

 
$
1,802

Share-based compensation expense related to all other Units
1,064

 
508

 
2,250

 
1,729

Total share-based compensation expense
$
1,064

 
$
1,063

 
$
3,545

 
$
3,531


Funds managed by Apollo Management VII, L.P., certain members of our senior management team and our board of directors formed Apollo CKE Holdings, L.P., a limited partnership (the “Partnership”) to fund the equity contribution to CKE Restaurants, Inc. The Partnership granted profit sharing interests (“Units”) in the Partnership to certain of our senior management team and directors in the form of time vesting and performance vesting Units. There are no income tax benefits associated with the Units. On August 13, 2012, the financial targets for the performance vesting Units were met causing all performance vesting Units to be converted into time vesting Units that will vest in two equal installments on August 13, 2013 and August 13, 2014. The maximum unrecognized compensation cost for unvested Units was $6,619 as of November 5, 2012.

NOTE 10 — FACILITY ACTION CHARGES, NET

The components of facility action charges, net are as follows:

 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Estimated liability for new restaurant closures
$

 
$

 
$

 
$
133

Adjustments to estimated liability for closed restaurants
20

 
(103
)
 
(237
)
 
420

Impairment of assets to be held and used

 
342

 
2,525

 
592

Loss (gain) on disposal of property and equipment
45

 
(9
)
 
88

 
(476
)
Other gains
(33
)
 
(87
)
 
(124
)
 
(337
)
Amortization of discount related to estimated liability for closed restaurants
70

 
119

 
280

 
371

 
$
102

 
$
262

 
$
2,532

 
$
703


12


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

We evaluate our restaurant-level long-lived assets for impairment whenever events or circumstances indicate that the carrying value of assets may be impaired. We determine whether the assets are recoverable by comparing the undiscounted future cash flows that we expect to generate from their use and disposal to their carrying value. Restaurant-level assets that are not deemed to be recoverable are written down to their estimated fair value, which is determined by assessing the highest and best use of the assets and the amounts that would be received for such assets in an orderly transaction between market participants. The determination of fair value is dependent upon level 3 significant unobservable inputs.

Impairment charges recognized in facility action charges, net were recorded against the following asset category:

 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Property and equipment:
 
 
 
 
 
 
 
Carl’s Jr.
$

 
$

 
$
1,195

 
$

Hardee’s

 
342

 
1,330

 
592

 
$

 
$
342

 
$
2,525

 
$
592


NOTE 11 — INCOME TAXES

Income tax expense (benefit) consisted of the following:

 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Federal and state income taxes
$
3,259

 
$
(2,483
)
 
$
1,781

 
$
(5,155
)
Foreign income taxes
432

 
341

 
1,569

 
1,278

Income tax expense (benefit)
$
3,691

 
$
(2,142
)
 
$
3,350

 
$
(3,877
)

Our effective income tax rate for the twelve and forty weeks ended November 5, 2012 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes and federal income tax credits. Our effective tax rate for the forty weeks ended November 5, 2012 also differs from the federal statutory rate as a result of the release of $6,370 of valuation allowance on state income tax credit and net operating loss (“NOL”) carryforwards. After considering all available evidence, both positive and negative, including future reversals of existing taxable temporary differences and estimated future taxable income exclusive of reversing temporary differences on a jurisdictional basis and statutory expiration dates of NOL carryforwards, we concluded that we will more likely than not realize future tax benefits related to certain of our state income tax credit and NOL carryforwards, for which an income tax benefit has not previously been recognized. As of November 5, 2012, we maintained a valuation allowance of $2,935 for a portion of our state NOL and income tax credit carryforwards. Realization of the tax benefit of such deferred income tax assets may remain uncertain for the foreseeable future, even if we generate consolidated taxable income, since they are subject to various limitations and may only be used to offset income of certain entities or in certain jurisdictions.

Our effective income tax rate for the twelve and forty weeks ended November 7, 2011 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes, federal income tax credits and the release of $237 of unrecognized tax benefits due to statute closures.


13


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

We had $2,977 of unrecognized tax benefits as of January 31, 2012 that, if recognized, would affect our effective income tax rate. There were no material changes in the unrecognized tax benefits during the forty weeks ended November 5, 2012. We believe that it is reasonably possible that decreases in unrecognized tax benefits of up to $1,642 may be necessary within twelve months as a result of statutes closing on such items. In addition, we believe that it is reasonably possible that our unrecognized tax benefits may increase as a result of tax positions that may be taken during the next twelve months.

We are included in the consolidated federal income tax returns and combined state income tax returns of CKE Inc. For the purpose of determining the income taxes attributed to CKE Restaurants, Inc. and its subsidiaries, we prepare our income tax provision as if we were a separate taxpayer. As a result of this treatment, we make income tax payments to CKE Inc. based upon our separate return taxable income.

NOTE 12 — SEGMENT INFORMATION

We are principally engaged in developing, operating, franchising and licensing our Carl’s Jr. and Hardee’s quick-service restaurant concepts, each of which is considered an operating segment that is managed and evaluated separately. The accounting policies of the segments are the same as those described in our summary of significant accounting policies (see Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2012).
 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Revenue:
 
 
 
 
 
 
 
Carl’s Jr.
$
158,042

 
$
149,966

 
$
527,875

 
$
508,414

Hardee’s
152,644

 
142,529

 
503,515

 
483,979

Other
113

 
124

 
367

 
538

Total
$
310,799

 
$
292,619

 
$
1,031,757

 
$
992,931

 
 
 
 
 
 
 
 
Segment income:
 
 
 
 
 
 
 
Carl’s Jr.
$
24,712

 
$
18,707

 
$
82,992

 
$
66,810

Hardee’s
31,535

 
26,016

 
101,524

 
86,023

Other
113

 
117

 
361

 
359

Total
56,360

 
44,840

 
184,877

 
153,192

Less: General and administrative expense
(30,800
)
 
(30,570
)
 
(102,288
)
 
(100,876
)
Less: Facility action charges, net
(102
)
 
(262
)
 
(2,532
)
 
(703
)
Less: Other operating expenses

 

 

 
(545
)
Operating income
25,458

 
14,008

 
80,057

 
51,068

Interest expense
(17,381
)
 
(17,415
)
 
(59,014
)
 
(59,626
)
Other income (expense), net
430

 
(252
)
 
(1,600
)
 
(1,668
)
Income (loss) before income taxes
$
8,507

 
$
(3,659
)
 
$
19,443

 
$
(10,226
)

14


CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Capital expenditures:
 
 
 
 
 
 
 
Carl’s Jr.
$
9,813

 
$
8,642

 
$
22,648

 
$
18,608

Hardee’s
3,545

 
7,275

 
15,575

 
25,034

Other
523

 
410

 
1,171

 
798

Total
$
13,881

 
$
16,327

 
$
39,394

 
$
44,440

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Depreciation and amortization included in segment income:
 
 
 
 
 
 
 
Carl’s Jr.
$
7,837

 
$
8,548

 
$
27,767

 
$
29,127

Hardee’s
8,550

 
9,712

 
30,694

 
31,178

Other

 

 

 

Other depreciation and amortization(1)
655

 
770

 
2,493

 
2,568

Total depreciation and amortization
$
17,042

 
$
19,030

 
$
60,954

 
$
62,873

___________
(1)
Represents depreciation and amortization excluded from the computation of segment income.

 
November 5, 2012
 
January 31, 2012
Total assets:
 
 
 
Carl’s Jr.
$
832,124

 
$
779,970

Hardee’s
614,577

 
633,127

Other
76,601

 
67,041

Total
$
1,523,302

 
$
1,480,138


NOTE 13 — RELATED PARTY TRANSACTIONS

Transactions with Apollo Management VII, L.P.

Pursuant to our management services agreement with Apollo Management VII, L.P. and in exchange for on-going investment banking, management, consulting and financial planning services, we are obligated to pay Apollo Management VII, L.P. an aggregate annual management fee of $2,500, which may be increased at Apollo Management VII, L.P.’s sole discretion up to an amount equal to two percent of our Adjusted EBITDA, as defined in our Credit Facility. We recorded $575, $574, $1,914 and $1,916 in management fees, which are included in general and administrative expense in our accompanying unaudited Condensed Consolidated Statements of Operations for the twelve weeks ended November 5, 2012 and November 7, 2011, and forty weeks ended November 5, 2012 and November 7, 2011, respectively.

Transactions with Board of Directors

Certain members of our Board of Directors are also our franchisees. These franchisees regularly pay royalties and purchase equipment and other products from us on the same terms and conditions as our other franchisees. During the forty weeks ended November 5, 2012 and November 7, 2011, total revenue generated from related party franchisees was $5,255 and $5,268, respectively, which is included in franchised restaurants and other revenue in our accompanying unaudited Condensed Consolidated Statements of Operations. As of November 5, 2012 and January 31, 2012, our related party trade receivables from franchisees were $389 and $252, respectively.


15


NOTE 14 — SUPPLEMENTAL CASH FLOW INFORMATION

 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
Cash paid for:
 
 
 
Interest, net of amounts capitalized
$
40,584

 
$
39,467

Income taxes paid (received), net
6,898

 
(64
)
Non-cash investing and financing activities:
 
 
 
Capital lease obligations incurred to acquire assets
2,482

 
2,976

Accrued property and equipment purchases
2,197

 
3,044


During the forty weeks ended November 7, 2011, we recorded a non-cash transaction to acquire three Hardee’s restaurants from a franchisee for an aggregate purchase price of $1,500. The entire purchase price was applied as a reduction of outstanding promissory notes due to the Company. See Note 3 for additional discussion.



16



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of financial statements with a narrative from the perspective of management on the financial condition, results of operations, liquidity and certain other factors that may affect future results. MD&A is presented in the following sections:

Overview
Operating Review
Liquidity and Capital Resources
Critical Accounting Policies
Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2013 Comparisons with Fiscal 2012
New Accounting Pronouncements Not Yet Adopted and Adoption of New Accounting Pronouncements
Presentation of Non-GAAP Measures
Certain Financial Information of CKE Inc.

The MD&A should be read in conjunction with the unaudited Condensed Consolidated Financial Statements contained herein and the CKE Restaurants, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2012 (the “2012 Annual Report”).

Overview

CKE Restaurants, Inc. (“CKE Restaurants”) and its subsidiaries (collectively referred to herein as the "Company", "we", "us" or "our"), is an owner, operator and franchisor of quick-service restaurants (“QSR”) in the United States and 27 other countries, operating principally under the Carl’s Jr.® and Hardee’s® brand names. As of November 5, 2012, we operated 893 domestic restaurants and our franchisees operated 1,937 domestic and 462 international restaurants, primarily under the Carl’s Jr. and Hardee’s brands. Domestic Carl’s Jr. restaurants are predominately located in the Western United States, primarily in California, with a growing presence in Texas. International Carl’s Jr. restaurants are located primarily in Mexico, with a growing presence in the rest of Latin America, Russia and Asia. Hardee’s restaurants are located predominately throughout the Southeastern and Midwestern United States, with a growing international presence in the Middle East and Central Asia. Our Green Burrito restaurants are primarily located in dual-branded Carl’s Jr. restaurants and our Red Burrito restaurants are exclusively located in dual-branded Hardee’s restaurants.


17


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)


Operating Review

The following tables present the change in our restaurant portfolios, consolidated and by brand, for the trailing-13 periods ended November 5, 2012:

 
Company-operated
 
Domestic Franchised
 
International Franchised
 
Total
Consolidated:
 
 
 
 
 
 
 
Open at November 7, 2011
894

 
1,927

 
398

 
3,219

New
4

 
45

 
78

 
127

Closed
(6
)
 
(34
)
 
(14
)
 
(54
)
Acquired
1

 

 

 
1

Divested

 
(1
)
 

 
(1
)
Open at November 5, 2012
893

 
1,937

 
462

 
3,292

Carl’s Jr.:
 
 
 
 
 
 
 
Open at November 7, 2011
425

 
692

 
175

 
1,292

New
3

 
27

 
54

 
84

Closed
(5
)
 
(19
)
 
(3
)
 
(27
)
Open at November 5, 2012
423

 
700

 
226

 
1,349

Hardee’s:
 
 
 
 
 
 
 
Open at November 7, 2011
469

 
1,225

 
223

 
1,917

New
1

 
18

 
24

 
43

Closed
(1
)
 
(12
)
 
(11
)
 
(24
)
Acquired
1

 

 

 
1

Divested

 
(1
)
 

 
(1
)
Open at November 5, 2012
470

 
1,230

 
236

 
1,936


18


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Consolidated
 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Revenue:
 
 
 
 
 
 
 
Company-operated restaurants
$
268,588

 
$
256,976

 
$
900,788

 
$
871,571

Franchised restaurants and other
42,211

 
35,643

 
130,969

 
121,360

Total revenue
310,799

 
292,619

 
1,031,757

 
992,931

Operating costs and expenses:
 
 
 
 
 
 
 
Restaurant operating costs
217,293

 
214,174

 
728,383

 
726,356

Franchised restaurants and other
21,564

 
17,907

 
66,047

 
62,225

Advertising
15,582

 
15,698

 
52,450

 
51,158

General and administrative
30,800

 
30,570

 
102,288

 
100,876

Facility action charges, net
102

 
262

 
2,532

 
703

Other operating expenses

 

 

 
545

Total operating costs and expenses
285,341

 
278,611

 
951,700

 
941,863

Operating income
25,458

 
14,008

 
80,057

 
51,068

Interest expense
(17,381
)
 
(17,415
)
 
(59,014
)
 
(59,626
)
Other income (expense), net
430

 
(252
)
 
(1,600
)
 
(1,668
)
Income (loss) before income taxes
8,507

 
(3,659
)
 
19,443

 
(10,226
)
Income tax expense (benefit)
3,691

 
(2,142
)
 
3,350

 
(3,877
)
Net income (loss)
$
4,816

 
$
(1,517
)
 
$
16,093

 
$
(6,349
)
 
 
 
 
 
 
 
 
Company-operated average unit volume (trailing-52 weeks)
$
1,291

 
$
1,246

 
 
 
 
Domestic franchise-operated average unit volume (trailing-52 weeks)
1,106

 
1,063

 
 
 
 
Company-operated same-store sales increase
4.6
%
 
1.9
 %
 
3.3
%
 
3.4
%
Domestic franchise-operated same-store sales increase (decrease)
4.5
%
 
(0.1
)%
 
3.4
%
 
1.9
%
 
 
 
 
 
 
 
 
Company-operated restaurant-level adjusted EBITDA(1):
 
 
 
 
 
 
 
Company-operated restaurants revenue
$
268,588

 
$
256,976

 
$
900,788

 
$
871,571

Less: restaurant operating costs
(217,293
)
 
(214,174
)
 
(728,383
)
 
(726,356
)
Add: depreciation and amortization expense
14,787

 
16,376

 
52,886

 
54,363

Less: advertising expense
(15,582
)
 
(15,698
)
 
(52,450
)
 
(51,158
)
Company-operated restaurant-level adjusted EBITDA
$
50,500

 
$
43,480

 
$
172,841

 
$
148,420

Company-operated restaurant-level adjusted EBITDA margin
18.8
%
 
16.9
 %
 
19.2
%
 
17.0
%
 
 
 
 
 
 
 
 
Franchise restaurant adjusted EBITDA(1):
 
 
 
 
 
 
 
Franchised restaurants and other revenue
$
42,211

 
$
35,643

 
$
130,969

 
$
121,360

Less: franchised restaurants and other expense
(21,564
)
 
(17,907
)
 
(66,047
)
 
(62,225
)
Add: depreciation and amortization expense
1,600

 
1,884

 
5,575

 
5,942

Franchise restaurant adjusted EBITDA
$
22,247

 
$
19,620

 
$
70,497

 
$
65,077

__________________
(1)
Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

19


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Carl’s Jr.
 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Company-operated restaurants revenue
$
142,947

 
$
136,111

 
$
479,866

 
$
462,769

Franchised restaurants and other revenue
15,095

 
13,855

 
48,009

 
45,645

Total revenue
158,042

 
149,966

 
527,875

 
508,414

Restaurant operating costs:
 
 
 
 
 
 
 
Food and packaging
42,278

 
40,929

 
141,897

 
139,869

Payroll and other employee benefits
40,331

 
38,102

 
135,448

 
130,820

Occupancy and other
34,246

 
35,594

 
113,286

 
117,291

Total restaurant operating costs
116,855

 
114,625

 
390,631

 
387,980

Franchised restaurants and other expense
7,753

 
7,842

 
25,368

 
25,335

Advertising expense
8,722

 
8,792

 
28,884

 
28,289

General and administrative expense
14,289

 
14,447

 
48,325

 
48,055

Facility action charges, net
80

 
(63
)
 
1,002

 
127

Operating income
$
10,343

 
$
4,323

 
$
33,665

 
$
18,628

 
 
 
 
 
 
 
 
Company-operated average unit volume (trailing-52 weeks)
$
1,457

 
$
1,405

 
 
 
 
Domestic franchise-operated average unit volume (trailing-52 weeks)
1,118

 
1,094

 
 
 
 
Company-operated same-store sales increase
5.5
%
 
2.0
 %
 
3.9
%
 
2.0
 %
Domestic franchise-operated same-store sales increase (decrease)
5.1
%
 
(2.5
)%
 
1.8
%
 
(0.8
)%
Company-operated same-store transaction increase (decrease)
4.3
%
 
(0.5
)%
 
3.5
%
 
(0.2
)%
Company-operated average check (actual $)
$
7.00

 
$
6.90

 
$
7.03

 
$
6.98

Restaurant operating costs as a percentage of company-operated restaurants revenue:
 
 
 
 
 
 
 
Food and packaging
29.6
%
 
30.1
 %
 
29.6
%
 
30.2
 %
Payroll and other employee benefits
28.2
%
 
28.0
 %
 
28.2
%
 
28.3
 %
Occupancy and other
24.0
%
 
26.2
 %
 
23.6
%
 
25.3
 %
Total restaurant operating costs
81.7
%
 
84.2
 %
 
81.4
%
 
83.8
 %
Advertising expense as a percentage of company-operated restaurants revenue
6.1
%
 
6.5
 %
 
6.0
%
 
6.1
 %
 
 
 
 
 


 


Company-operated restaurant-level adjusted EBITDA(1):
 
 
 
 


 


Company-operated restaurants revenue
$
142,947

 
$
136,111

 
$
479,866

 
$
462,769

Less: restaurant operating costs
(116,855
)
 
(114,625
)
 
(390,631
)
 
(387,980
)
Add: depreciation and amortization expense
7,053

 
7,760

 
25,140

 
26,487

Less: advertising expense
(8,722
)
 
(8,792
)
 
(28,884
)
 
(28,289
)
Company-operated restaurant-level adjusted EBITDA
$
24,423

 
$
20,454

 
$
85,491

 
$
72,987

Company-operated restaurant-level adjusted EBITDA margin
17.1
%
 
15.0
 %
 
17.8
%
 
15.8
 %
 
 
 
 
 
 
 
 
Franchise restaurant adjusted EBITDA(1):
 
 
 
 
 
 
 
Franchised restaurants and other revenue
$
15,095

 
$
13,855

 
$
48,009

 
$
45,645

Less: franchised restaurants and other expense
(7,753
)
 
(7,842
)
 
(25,368
)
 
(25,335
)
Add: depreciation and amortization expense
784

 
788

 
2,627

 
2,640

Franchise restaurant adjusted EBITDA
$
8,126

 
$
6,801

 
$
25,268

 
$
22,950

__________________
(1)
Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

20


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Hardee’s
 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Company-operated restaurants revenue
$
125,641

 
$
120,865

 
$
420,922

 
$
408,690

Franchised restaurants and other revenue
27,003

 
21,664

 
82,593

 
75,289

Total revenue
152,644

 
142,529

 
503,515

 
483,979

Restaurant operating costs:
 
 
 
 
 
 
 
Food and packaging
38,032

 
37,835

 
127,028

 
127,980

Payroll and other employee benefits
35,328

 
34,381

 
119,209

 
118,563

Occupancy and other
27,078

 
27,326

 
91,515

 
91,654

Total restaurant operating costs
100,438

 
99,542

 
337,752

 
338,197

Franchised restaurants and other expense
13,811

 
10,065

 
40,673

 
36,890

Advertising expense
6,860

 
6,906

 
23,566

 
22,869

General and administrative expense
16,511

 
16,124

 
53,963

 
52,823

Facility action charges, net
22

 
326

 
1,530

 
573

Operating income
$
15,002

 
$
9,566

 
$
46,031

 
$
32,627

 
 
 
 
 
 
 
 
Company-operated average unit volume (trailing-52 weeks)
$
1,142

 
$
1,102

 
 
 
 
Domestic franchise-operated average unit volume (trailing-52 weeks)
1,099

 
1,045

 
 
 
 
Company-operated same-store sales increase
3.6
 %
 
1.8
 %
 
2.6
 %
 
5.0
%
Domestic franchise-operated same-store sales increase
4.2
 %
 
1.3
 %
 
4.2
 %
 
3.4
%
Company-operated same-store transaction (decrease) increase
(0.7
)%
 
(1.5
)%
 
(1.8
)%
 
0.5
%
Company-operated average check (actual $)
$
5.53

 
$
5.30

 
$
5.58

 
$
5.34

Restaurant operating costs as a percentage of company-operated restaurants revenue:
 
 
 
 
 
 
 
Food and packaging
30.3
 %
 
31.3
 %
 
30.2
 %
 
31.3
%
Payroll and other employee benefits
28.1
 %
 
28.4
 %
 
28.3
 %
 
29.0
%
Occupancy and other
21.6
 %
 
22.6
 %
 
21.7
 %
 
22.4
%
Total restaurant operating costs
79.9
 %
 
82.4
 %
 
80.2
 %
 
82.8
%
Advertising expense as a percentage of company-operated restaurants revenue
5.5
 %
 
5.7
 %
 
5.6
 %
 
5.6
%
 
 
 
 
 
 
 
 
Company-operated restaurant-level adjusted EBITDA(1):
 
 
 
 
 
 
 
Company-operated restaurants revenue
$
125,641

 
$
120,865

 
$
420,922

 
$
408,690

Less: restaurant operating costs
(100,438
)
 
(99,542
)
 
(337,752
)
 
(338,197
)
Add: depreciation and amortization expense
7,734

 
8,616

 
27,746

 
27,876

Less: advertising expense
(6,860
)
 
(6,906
)
 
(23,566
)
 
(22,869
)
Company-operated restaurant-level adjusted EBITDA
$
26,077

 
$
23,033

 
$
87,350

 
$
75,500

Company-operated restaurant-level adjusted EBITDA margin
20.8
 %
 
19.1
 %
 
20.8
 %
 
18.5
%
 
 
 
 
 
 
 
 
Franchise restaurant adjusted EBITDA(1):
 
 
 
 
 
 
 
Franchised restaurants and other revenue
$
27,003

 
$
21,664

 
$
82,593

 
$
75,289

Less: franchised restaurants and other expense
(13,811
)
 
(10,065
)
 
(40,673
)
 
(36,890
)
Add: depreciation and amortization expense
816

 
1,096

 
2,948

 
3,302

Franchise restaurant adjusted EBITDA
$
14,008

 
$
12,695

 
$
44,868

 
$
41,701

__________________
(1)
Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

21


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Consolidated

Total Revenue

Total revenue increased $18,180, or 6.2%, to $310,799 during the twelve weeks ended November 5, 2012, as compared to the prior year period, due to the increase in company-operated restaurants revenue of $11,612 and the increase in franchised restaurants and other revenue of $6,568. Company-operated same-store sales increased 4.6%, and domestic franchise-operated same-store sales increased 4.5%.

Total revenue increased $38,826, or 3.9%, to $1,031,757 during the forty weeks ended November 5, 2012, as compared to the prior year period, due to the increase in company-operated restaurants revenue of $29,217 and the increase in franchised restaurants and other revenue of $9,609. Company-operated same-store sales increased 3.3%, and domestic franchise-operated same-store sales increased 3.4%.

Restaurant Operating Costs

Restaurant operating costs increased $3,119, or 1.5%, to $217,293 during the twelve weeks ended November 5, 2012, as compared to the prior year period. Restaurant operating costs as a percentage of company-operated restaurants revenue were 80.9% for the twelve weeks ended November 5, 2012, as compared to 83.3% for the twelve weeks ended November 7, 2011. This decrease in restaurant operating costs as a percentage of company-operated restaurants revenue was in part due to the increase in company-operated same-store sales, which was driven, in part, by menu price increases taken over the past year. Occupancy and other expense as a percentage of company-operated restaurants revenue decreased 170 basis points compared to the prior year period, primarily as a result of sales leverage and lower repairs and maintenance expense and utilities expense. Food and packaging costs as a percentage of company-operated restaurants revenue decreased 70 basis points from the prior year period, primarily as a result of higher restaurant pricing and changes in product mix. While commodity costs for beef products were essentially flat when compared to the prior year period, commodity costs for flour, chicken and potato products increased and commodity costs for pork, cheese and dairy products products decreased. Payroll and other employee benefits as a percentage of company-operated restaurants revenue were comparable to the prior year period.

Restaurant operating costs increased $2,027, or 0.3%, to $728,383 during the forty weeks ended November 5, 2012, as compared to the prior year period. Restaurant operating costs as a percentage of company-operated restaurants revenue were 80.9% for the forty weeks ended November 5, 2012, as compared to 83.3% for the forty weeks ended November 7, 2011. This decrease in restaurant operating costs as a percentage of company-operated restaurants revenue was in part due to the increase in company-operated same-store sales, which was driven, in part, by menu price increases taken over the past year. Occupancy and other expense as a percentage of company-operated restaurants revenue decreased 120 basis points compared to the prior year period, primarily as a result of sales leverage and lower repairs and maintenance expense and utilities expense. Food and packaging costs as a percentage of company-operated restaurants revenue decreased 90 basis points from the prior year period, primarily as a result of higher restaurant pricing and changes in product mix. Commodity costs for potato, chicken and beef products increased, while commodity costs for pork, cheese and produce products decreased. Payroll and other employee benefits as a percentage of company-operated restaurants revenue decreased 30 basis points from the prior year period.
 
Franchised Restaurants and Other Expense

During the twelve weeks ended November 5, 2012, franchised restaurants and other expense increased $3,657, or 20.4%, to $21,564, from the comparable prior year period, mainly due to an increase in equipment distribution center costs of $4,058 resulting from higher equipment sales to franchisees. During the forty weeks ended November 5, 2012, franchised restaurants and other expense increased $3,822, or 6.1%, to $66,047 from the comparable prior year period, mainly due to an increase in equipment distribution center costs of $4,341 resulting from higher equipment sales to franchisees.


22


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Advertising Expense

Advertising expense decreased $116, or 0.7%, to $15,582 during the twelve weeks ended November 5, 2012, as compared to the prior year period. Advertising expense as a percentage of company-operated restaurants revenue was 5.8% during the twelve weeks ended November 5, 2012 and 6.1% during the twelve weeks ended November 7, 2011.

Advertising expense increased $1,292, or 2.5%, to $52,450 during the forty weeks ended November 5, 2012, as compared to the prior year period. Advertising expense as a percentage of company-operated restaurants revenue was 5.8% during the forty weeks ended November 5, 2012 and 5.9% during the forty weeks ended November 7, 2011.

General and Administrative Expense

During the twelve weeks ended November 5, 2012 general and administrative expense of $30,800 was comparable to the prior year period.

General and administrative expense increased $1,412, or 1.4%, to $102,288 during the forty weeks ended November 5, 2012 from the prior year period. This increase was mainly due to an increase of $1,903 in bonus expense, which is based on our performance relative to executive management and operations bonus criteria, partially offset by reduced legal expenditures.

Facility Action Charges, Net

During the twelve weeks ended November 5, 2012, net facility action charges were $102, which primarily resulted from the amortization of discount related to the estimated liability for closed restaurants.

During the forty weeks ended November 5, 2012, net facility action charges were $2,532, which primarily resulted from asset impairment charges of $2,525. These asset impairment charges primarily consisted of $1,195 of impairment charges recorded for two underperforming company-operated Carl's Jr. restaurants and a $1,204 impairment charge recorded for a property leased to a franchisee that became impaired due to a highway project that will eliminate direct access to the property, rendering it unfit for retail purposes.

See Note 10 of Notes to Condensed Consolidated Financial Statements included herein for additional detail of the components of facility action charges, net.

Interest Expense

During the twelve weeks ended November 5, 2012, interest expense decreased $34, or 0.2%, to $17,381, as compared to the prior year period. This decrease was primarily caused by a reduction of interest expense on our senior secured second lien notes (the "Senior Secured Notes") of $2,203 due to the early redemption of our Senior Secured Notes and a reduction of interest expense on our capital lease obligations of $128, which were largely offset by an increase in interest expense from our financing method sale-leaseback transactions of $2,257.

During the forty weeks ended November 5, 2012, interest expense decreased $612, or 1.0%, to $59,014, as compared to the prior year period. This decrease was primarily caused by a reduction of interest expense on our Senior Secured Notes of $6,656 due to the early redemption of our Senior Secured Notes and a reduction of interest expense on our capital lease obligations of $484, which were largely offset by an increase in interest expense from our financing method sale-leaseback transactions of $6,487.

See Note 4 of Notes to Condensed Consolidated Financial Statements included herein for additional detail of the components of interest expense.


23


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Income Tax Benefit

Our effective income tax rate for the twelve and forty weeks ended November 5, 2012 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes and federal income tax credits. Our effective tax rate for the forty weeks ended November 5, 2012 also differs from the federal statutory rate as a result of the release of $6,370 of valuation allowance on state income tax credit and net operating loss (“NOL”) carryforwards. Our effective income tax rate for the twelve and forty weeks ended November 7, 2011 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes, federal income tax credits and the release of $237 of unrecognized tax benefits due to statute closures.

Carl’s Jr.

Company-Operated Restaurants Revenue

Revenue from company-operated Carl’s Jr. restaurants increased $6,836, or 5.0%, to $142,947 during the twelve weeks ended November 5, 2012, as compared to the twelve weeks ended November 7, 2011. This increase was primarily due to the 5.5% increase in company-operated same-store sales for the quarter. Both menu price increases and same-store transaction increases contributed to the same-store sales increase.

Revenue from company-operated Carl’s Jr. restaurants increased $17,097, or 3.7%, to $479,866 during the forty weeks ended November 5, 2012, as compared to the forty weeks ended November 7, 2011. This increase was primarily due to the 3.9% increase in company-operated same-store sales from the comparable prior year period. Both menu price increases and same-store transaction increases contributed to the same-store sales increase.

Company-Operated Restaurant-Level Adjusted EBITDA Margin

The changes in the company-operated restaurant-level adjusted EBITDA margin are summarized as follows:

 
 
Twelve Weeks
 
Forty Weeks
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 7, 2011
 
15.0
 %
 
15.8
 %
Decrease in food and packaging costs
 
0.5

 
0.7

Payroll and other employee benefits:
 
 
 
 
Increase in workers’ compensation expense
 
(0.7
)
 
(0.4
)
Decrease in labor costs, excluding workers’ compensation
 
0.5

 
0.4

Occupancy and other (excluding depreciation and amortization):
 
 
 
 
Decrease in utilities expense
 
0.4

 
0.4

Decrease in repairs and maintenance expense
 
0.3

 
0.5

Decrease in rent expense
 
0.3

 
0.2

Decrease in biscuit roll-out costs
 
0.3

 
0.1

Other, net
 
0.1

 

Decrease in advertising expense
 
0.4

 
0.1

Company-operated restaurant-level adjusted EBITDA margin for the period ended November 5, 2012
 
17.1
 %
 
17.8
 %


24


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Food and Packaging Costs

Food and packaging costs decreased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 5, 2012, as compared to the prior year periods, mainly due to the impact of menu price increases taken over the past year and changes in product mix. During the twelve weeks ended November 5, 2012, commodity costs for potato, chicken and flour products increased and commodity costs for cheese, dairy and pork products decreased. During the forty weeks ended November 5, 2012, commodity costs for potato, chicken and beef products increased, while commodity costs for produce, cheese and pork products decreased from the comparable prior year period.

Payroll and Other Employee Benefits

Workers' compensation expense increased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 5, 2012, as compared to the prior year period, due primarily to unfavorable claims reserve adjustments as a result of actuarial analyses of outstanding claims reserves in the current year period and favorable claims reserve adjustments in the comparable prior year period. During the forty weeks ended November 5, 2012, workers' compensation expense increased as a percentage of company-operated restaurants revenue, as compared to the prior year period, due primarily to the impact of unfavorable claims reserve adjustments in the current year period that did not occur to the same extent in the prior year period.

Labor costs, excluding workers' compensation expense, decreased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 5, 2012, as compared to the prior year periods, due primarily to more efficient use of labor in the restaurants and sales leverage resulting from the company-operated same-store sales increase.

Occupancy and Other Costs

Utilities expense decreased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 5, 2012, as compared to the prior year periods, mainly due to a decrease in electricity and gas rates, and sales leverage caused by the increase in company-operated same-store sales.

Repairs and maintenance expense decreased as a percentage of company-operated restaurants revenue during
the twelve weeks ended November 5, 2012, as compared to the prior year period, mainly due to decreased spending on repairs of restaurant equipment and building maintenance, and sales leverage caused by the increase in company-operated same-store sales. Repairs and maintenance expense decreased as a percentage of company-operated restaurants revenue during the forty weeks ended November 5, 2012, as compared to the prior year periods, mainly due to decreased spending on contract services, repairs of restaurant equipment and building maintenance, and sales leverage caused by the increase in company-operated same-store sales.

Rent expense decreased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 5, 2012, as compared to the prior year period, mainly due to sales leverage resulting from the company-operated same-store sales increase.

Biscuit roll-out costs decreased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 5, 2012, from the comparable prior year period, due to the additional costs incurred in connection with the roll-out of Hardee's Made From Scratch breakfast biscuits at Carl's Jr. in the Los Angeles market in the prior year period, which did not recur in the current year period.

Depreciation and amortization expense decreased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 5, 2012, as compared to the prior year periods, due primarily to sales leverage and certain property and equipment reaching the end of its estimated useful life.


25


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Advertising Expense

Advertising expense as a percentage of company-operated restaurants revenue decreased from 6.5% to 6.1% during the twelve weeks ended November 5, 2012, as compared to the prior year period. The decrease as a percentage of company-operated restaurants revenue was mainly due to incremental print and media spending in the prior year period to promote the roll-out of Hardee's Made From Scratch breakfast biscuits at Carl's Jr. in the Los Angeles market and incremental media spending in select markets that did not recur in the current year period.

Franchised Restaurants

 
Twelve Weeks Ended
 
Forty Weeks Ended
 
November 5, 2012
 
November 7, 2011
 
November 5, 2012
 
November 7, 2011
Franchised restaurants and other revenue:
 
 
 
 
 
 
 
Royalties
$
9,076

 
$
7,813

 
$
29,540

 
$
26,608

Rent and other occupancy
5,123

 
5,387

 
16,554

 
17,400

Franchise fees
896

 
655

 
1,915

 
1,637

Total franchised restaurants and other revenue
$
15,095

 
$
13,855

 
$
48,009

 
$
45,645

Franchised restaurants and other expense:
 
 
 
 
 
 
 
Administrative expense (including provision for bad debts)
$
3,009

 
$
2,950

 
$
9,380

 
$
9,016

Rent and other occupancy
4,744

 
4,892

 
15,988

 
16,319

Total franchised restaurants and other expense
$
7,753

 
$
7,842

 
$
25,368

 
$
25,335


Franchised restaurants and other revenue increased $1,240, or 8.9%, to $15,095 during the twelve weeks ended November 5, 2012, as compared to the prior year period. Royalty revenues increased $1,263, or 16.2%, to $9,076, due primarily to the net increase of 51 international and 8 domestic franchised restaurants since the end of the third quarter of fiscal 2012 and an increase in domestic franchise-operated same-store sales of 5.1%.

Franchised restaurants and other revenue increased $2,364, or 5.2%, to $48,009 during the forty weeks ended November 5, 2012, as compared to the prior year period. Royalty revenues increased $2,932, or 11.0%, to $29,540, due primarily to the net increase of 51 international and 8 domestic franchised restaurants since the end of the third quarter of fiscal 2012 and an increase in domestic franchise-operated same-store sales of 1.8%.

During the twelve and forty weeks ended November 5, 2012, franchised restaurants and other expense was consistent with the prior year periods.

Hardee’s

Company-Operated Restaurants Revenue

Revenue from company-operated Hardee’s restaurants increased $4,776, or 4.0%, to $125,641 during the twelve weeks ended November 5, 2012, as compared to the twelve weeks ended November 7, 2011. This increase was primarily due to the 3.6% increase in company-operated same-store sales for the quarter, which was driven mainly by menu price increases taken over the past year.

Revenue from company-operated Hardee’s restaurants increased $12,232, or 3.0%, to $420,922 during the forty weeks ended November 5, 2012, as compared to the forty weeks ended November 7, 2011. This increase was primarily due to the 2.6% increase in company-operated same-store sales from the comparable prior year period, which was driven mainly by menu price increases taken over the past year.


26


CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
(Dollars in thousands)

Company-Operated Restaurant-Level Adjusted EBITDA Margin

The changes in the company-operated restaurant-level adjusted EBITDA margin are summarized as follows:

 
 
Twelve Weeks
 
Forty Weeks
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 7, 2011
 
19.1
 %
 
18.5
 %
Decrease in food and packaging costs
 
1.0

 
1.1

Payroll and other employee benefits: