Carl’s New Star

INDIAN WELLS, Calif. — The desert sun was setting as William P. Foley II, calm and cool as usual, munched popcorn and maneuvered a golf cart into his garage after 27 holes at a local resort. But the day was hardly over.

In less than an hour, two busloads of Wall Street analysts and stockbrokers would converge on Foley’s stylish weekend home in an exclusive neighborhood for a cocktail party to hear about plans for the newly reinvigorated Carl’s Jr.

“Up until now, this kind of meeting wouldn’t have occurred,” said Foley, chairman of CKE Restaurants, the Anaheim-based parent of the fast-food chain. “We couldn’t have gotten this many analysts to listen to us because we didn’t have a good story to tell.”

What analysts heard on that chilly winter night--and the next day at a formal presentation--was the story of a rebound at the 56-year-old chain that for years had been getting walloped by McDonald’s and Burger King.

It was a tale about an industry outsider who managed to do what a fast-food pioneer no longer seemed capable of: pull the troubled 675-unit chain out of an ever-deepening spiral.

It started with Carl N. Karcher Jr., a deeply religious man who installed a St. Francis of Assisi statue in the foyer of the company he founded in Anaheim in 1941 and who long ago secured a place in fast-food industry lore with drive-through windows, bacon cheeseburgers and salad bars.

Now the story focuses on Foley, a multimillionaire and West Point graduate who loves to do deals and whose only previous fast-food experience was buying the occasional burger. Although Karcher’s name is still on the door, Foley has clearly emerged as the chain’s new patriarch.

A 52-year-old businessman who made his fortune in title insurance, Foley has presided over an 80% share price jump in the last year alone and is laying the groundwork for a long-overdue national expansion. (Nearly all the Carl’s Jr. restaurants are in Southern California.)

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Foley has also secured at least a footnote in marketing history for daring to hire a cross-dressing power forward with a penchant for controversy as the chain’s spokesman.

TV commercials featuring basketball star Dennis Rodman, ghoulish humor, rock musicians and a bosomy woman are part of Foley’s effort to reshape the staid chain’s image into that of the hip home of in-your-face burgers.

The new ads appeal to the 18- to 35-year-old males who drool for sandwiches like the Double Western Bacon Cheeseburger, a 970-calorie gut bomb that is a dietitian’s nightmare.

And that’s the crucial segment of the business that Carl’s Jr.--whose ads had long featured the grandfatherly founder and his cartoon star sidekick--had forgotten.

Foley’s rapid-fire approach has stunned some observers and garnered a number of complaints from viewers, but the cheeky advertising is working.

“It’s clear from Foley’s arrival that you can teach an old dog new tricks,” said Robert Derrington, an analyst with Nashville-based Equitable Securities Inc. who was among those who came to Foley’s weekend home last month. “Bill Foley used aggressive tactics to build his title insurance business, and it’s clear he’s doing the same thing with Carl’s.”

One of those tricks was enlisting Tom Thompson, a disgruntled Bay Area franchisee, to take over day-to-day operations. Thompson responded by cutting costs and refocusing the chain’s menu.

But investors are less certain about the string of deals that Foley’s pulled out of his hat. Among them: agreeing to operate 28 Rally’s fast-food restaurants on the West Coast, acquiring a Texas-based taco chain and taking a controlling stake in Checkers, a troubled chain in Florida.

Wall Street analysts “like pure plays like McDonald’s and don’t want any surprises,” said Norm Haberman, who used to run Family Restaurants in Irvine. “And they don’t understand a guy like Foley, who buys these ‘yo-yo’ chains, volatile companies that can go up and down.”

Foley has also learned what longtime industry executives already knew: An unexpected move by market leader McDonald’s can upset even the best-laid plans.

Foley watched glumly as CKE’s share price plunged 18% when word surfaced two weeks ago that McDonald’s would offer deep discounts on its popular Big Macs, setting the stage for the possibility of a burger price war.

“Our stock really got hammered,” Foley said. “And it wasn’t pretty to see it happen.”

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He blamed the painful share price drop on “momentum investors who sell aggressively” when news hits the wire. But he maintains that long-term investors have nothing to fear.

“We’re not going to join a price war,” Foley said. “And we don’t think there’s any real, significant risk to our business from McDonald’s.”

Foley is something of an accidental burger king.

His involvement with the troubled chain stemmed from a hastily brokered deal that rescued 80-year-old Karcher from a personal bankruptcy driven by a string of unwise investments. Karcher hated to lose control of the chain he had built. But he gladly embraced Foley--particularly after the businessman offered him the title of chairman emeritus.

Late in 1993, with Karcher about to default on a $24-million personal loan secured by 3.8 million CKE shares, the two businessmen joined forces in an unlikely alliance.

Foley organized an investment group that assumed Karcher’s loan, and Karcher contributed his CKE shares to the partnership. Foley was also named chairman of the firm.

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He initially planned to sit on the sidelines and let existing management fix the broken chain. But as it became obvious that CKE was losing a price war with the major chains, Foley stepped in.

A student of military history--the partnership he formed to take control of the burger chain is named Cannae, after the Italian town where Hannibal whipped the mighty Roman army--Foley didn’t flinch at the thought of taking on McDonald’s and Burger King.

But the upstart burger baron picked his battles carefully. He abandoned the ill-advised price war and instead focused on an under-defended market niche: serving up bigger, juicier burgers with potentially fatter profit margins.

Bigger has been better. Carl’s Jr. recently reported that 1996 sales at stores open at least a year--”same-store” sales, a key indicator in the restaurant industry--rose by 10.5% during the fourth quarter and 10.7% during the year. Those are heady figures for a company that had seen same-store sales slide for nearly three years.

The burger revival has translated into good news for Foley and Karcher: The value of the 3.8 million shares has quadrupled to about $100 million.

“I’m a shareholder and I’m just trying to protect my interests,” Foley said. “That’s what this is about . . . shareholder value.”

Foley runs his expanding empire from Santa Barbara, where he and his wife, Carol, moved their two children two years ago, trading busy Newport Beach for small-town charms.

But he’s only a short corporate jet flight from Orange County, headquarters for both Carl’s and Irvine-based Fidelity National Financial, his title insurance business where he remains chairman and chief executive.

The trim golfer who’s chipping away at his impressive four handicap is gradually assembling top lieutenants from both companies in Santa Barbara, where he also is part owner of a nearby winery.

Foley, a native Texan who graduated from the U.S. Military Academy at West Point and served in the Air Force, has developed a reputation as a tough field general.

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A former boss at a savings and loan where Foley worked during the early 1980s described him as “dictatorial, to say the least.”

By his own admission, Foley has only recently tackled the necessary art of delegation.

He’s known to be an inveterate deal maker, in large part because of the string of mergers he brokered while turning Fidelity National into the nation’s fourth-largest title insurance company.

Said Daniel D. “Ron” Lane, a board member at both CKE and Fidelity National: “The other day I asked him, ‘Billy, why are you working so much when you could be out golfing?’ And he said: ‘Because I’m addicted. I’m addicted to the deals.’ ”

Friends say Foley also is constantly on the prowl for companies--like CKE Restaurants--that have “hidden shareholder value.” During the last two years, Foley claims to have looked at hundreds of possible deals.

“That’s what he considers fun. He enjoys making deals,” said Haberman, now a Santa Barbara businessman and Foley golf partner. “He’s in it for the love, the art, of the deal. And Bill is very shrewd.”

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Sometimes Foley’s raiding party runs into stiff opposition. That was the case in 1996 when he made an aborted attempt to take over Giant Group Ltd., a company that controls the Rally’s fast-food chain.

Foley and Giant Group Chairman Burt Sugarman traded words and lawsuits before eventually signing a peace treaty.

“The lawsuits with Giant were a mistake,” said Foley, who has since allied himself with Sugarman. “We should have started talking earlier. We found out that we have a lot in common.”

When Foley joined CKE, Wall Street analysts weren’t sure what to make of the chain. Each time the company’s momentum shifted, they began wondering, “What’s the surprise du jour?”

They now know that the recovery has been driven largely by Thompson, who serves as the company’s chief operating officer.

Shortly after Foley arrived on the scene, Thompson began lobbying to abandon the price war. Foley eventually invited Thompson to commute to Anaheim to run the chain.

Foley then busied himself with a secondary stock offering that enriched CKE’s coffers by $71.6 million and paved the way for a string of deals that gave Carl’s Jr. access to rapidly growing markets in Texas and Florida.

Newfound ally Sugarman turned over the 28 poorly performing Rally’s restaurants to Thompson, who quickly made them profitable. Sugarman then directed Foley to Checkers, a Clearwater, Fla.-based rival that also was wallowing in red ink.

CKE Restaurants purchased a controlling stake in the Checkers chain, and Thompson’s team now hopes to use a familiar recipe--big, messy burgers and loud advertising--to revive its profit.

Foley also purchased the potentially lucrative Taco Bueno chain in Texas and a Utah-based family restaurant chain that most likely will be spun off.

Foley hints that the deal making isn’t yet done: “There are a lot of broken chains out there that need fixing.”

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Fast food, by its nature, is a mercurial industry, and as Carl’s Jr. expands from its base in Southern California, its management team might be overwhelmed by the demands of fast-paced growth. But Foley argues that his company has something it has always lacked: a bona fide expansion plan.

“Our short-term plan is to open 300 company restaurants and 200 franchisee locations,” Foley said. “Our long-term goal is to create a Carl’s Jr. chain that stretches across the country.”

Has Bill Foley found a home in the restaurant business?

“I’m not going anywhere,” Foley responds with a grin. “I’m having too much fun.”

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Restoring Carl’s Jr.’s Luster

Since taking over the helm at CKE Restaurants, William P. Foley II has made a number of innovative moves to set the fast-food chain up for a national expansion.

CKE Restaurants at a Glance

Headquarters: Anaheim

Business: Restaurant holding company consisting of the following divisions:

Carl Karcher Enterprises: Owns and operates 675 Carl’s Jr. restaurants and operates 28 Rally’s Hamburgers units on the West Coast.

Summit Family Restaurants: Owns 96 JB’s Restaurants, 16 HomeTown Buffets, 6 Galaxy Diners

Casa Bonita Inc.: 107 Taco Bueno units and two Casa Bonita units.

Other investments: 10% equity in Checker’s Drive-In Restaurant chain, 18% equity in Rally’s Hamburgers chain, and 30% equity in Boston West LLA, which owns 85 Boston Market units.

Founded: 1941 by Carl N. Karcher

1996 revenue: $465.4 million

1996 net income: $11.0 million

Employees: 20,450

Status: Public

Exchange: NYSE

52-week range: $9.67-$25.75

Friday’s close: $18.375

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Foley’s Moves

* Exits fast-food price war, instead playing up bigger, juicier burgers

* Begins a more aggressive, youth-oriented advertising campaign

* Brings Carl’s Jr. franchisee Tom Thompson from Bay Area to serve as chief operating officer. Thompson runs day-to-day operations; Foley focuses on acquisitions and strategy.

* Hires flamboyant basketball star Dennis Rodman as spokesman

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Profit Picture

CKE suffered a loss in 1993, but has since turned a profit on less revenue. Revenue and net income (in millions):

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Net sales Net Income 1992 $533.6 $13.0 1993 $502.6 -$5.5 1994 $460.4 $3.7 1995 $443.7 $1.3 1996 $465.4 $11.0

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Top 10 Burger Chains

Carl’s Jr. ranks seventh among the top 10 fast-food burger chains in annual sales. The top five all exceed $1 billion a year. National ranking based on systemwide sales for the latest fiscal years, in millions:

1. McDonald’s: $29,914

2. Burger King: $8,400

3. Wendy’s: $4,500

4. Hardee’s: $3,360

5. Jack-In-The-Box: $1,123

6. Sonic Drive-Ins: $881

7. Carl’s Jr.: $575

8. Whataburger: $500

9. Checker’s Drive-in Restaurants: $374

10. Rally’s Hamburgers: $355

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Stock Rocket

Even with a recent sag, CKE’s stock price has more than quadrupled since closing 1990 at about $4. Monthly closing prices:

1990

Jan.: $6.50

1997:

Friday’s Close: $18.375

Sources: Times reports, Bloomberg Business News, CKE Restaurants; Technomic

Researched by JANICE JONES / Los Angeles Times