Cke Restaurants (CKR) 10-Q 2009 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended November 3, 2008

OR

£ 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

CKE RESTAURANTS, INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0602639
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
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

Former Name, Former Address and Former Fiscal Year, if changed since last report.

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 R No £

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. (Check one):

Large accelerated filer £	Accelerated filer R	Non-accelerated filer £	Smaller reporting company £
	(Do not check if a smaller reporting company)

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

As of December 4, 2008, 54,643,498 shares of the registrant’s common stock were outstanding.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

INDEX

	Page No.
Part I. Financial Information
Item 1 Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of November 3, 2008 and January 31, 2008		3
Condensed Consolidated Statements of Income for the twelve and forty weeks ended November 3, 2008 and November 5, 2007		4
Condensed Consolidated Statement of Stockholders’ Equity for the forty weeks ended November 3, 2008		5
Condensed Consolidated Statements of Cash Flows for the forty weeks ended November 3, 2008 and November 5, 2007		6
Notes to Condensed Consolidated Financial Statements		7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3 Quantitative and Qualitative Disclosures About Market Risk		31
Item 4 Controls and Procedures		31
Part II. Other Information
Item 1 Legal Proceedings		32
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 6 Exhibits		33
Signatures		34

2

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)

	November 3, 2008				January 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	21,424			$	19,993
Accounts receivable, net of allowance for doubtful accounts of $427 as of November 3, 2008 and $755 as of January 31, 2008		44,217				51,394
Related party trade receivables		4,643				5,179
Inventories, net		23,502				26,030
Prepaid expenses		14,580				12,509
Assets held for sale		556				1,038
Advertising fund assets, restricted		17,068				18,207
Deferred income tax assets, net		13,405				23,768
Other current assets		2,134				2,887
Total current assets		141,529				161,005
Notes receivable, net of allowance for doubtful accounts of $546 as of November 3, 2008 and $608 as of January 31, 2008		164				298
Property and equipment, net of accumulated depreciation and amortization of $418,822 as of November 3, 2008 and $422,192 as of January 31, 2008		524,992		��		503,774
Property under capital leases, net of accumulated amortization of $47,782 as of November 3, 2008 and $46,390 as of January 31, 2008		18,887				21,104
Deferred income tax assets, net		64,469				72,878
Goodwill		22,649				22,649
Other assets, net		10,397				10,003
Total assets	$	783,087			$	791,711
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of bank indebtedness and other long-term debt	$	2,747			$	18,024
Current portion of capital lease obligations		5,924				5,774
Accounts payable		57,212				80,697
Advertising fund liabilities		17,068				18,207
Other current liabilities		92,273				86,678
Total current liabilities		175,224				209,380
Bank indebtedness and other long-term debt, less current portion		315,746				333,082
Capital lease obligations, less current portion		30,918				35,156
Other long-term liabilities		69,196				68,851
Total liabilities		591,084				646,469
Commitments and contingencies (Notes 4 and 6)
Subsequent events (Notes 2, 4 and 7)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000 shares authorized; none issued or outstanding		—				—
Series A Junior Participating Preferred stock, $.01 par value; 1,500 shares authorized; none issued or outstanding		—				—
Common stock, $.01 par value; 100,000 shares authorized; 54,644 shares issued and outstanding as of November 3, 2008; 52,504 shares issued and 52,476 shares outstanding as of January 31, 2008		546				525
Common stock held in treasury, at cost; none as of November 3, 2008 and 28 shares as of January 31, 2008		—				(359	)
Additional paid-in capital		273,127				251,524
Accumulated deficit		(81,670	)			(106,448	)
Total stockholders’ equity		192,003				145,242
Total liabilities and stockholders’ equity	$	783,087			$	791,711

See Accompanying Notes to Condensed Consolidated Financial Statements

3

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Twelve Weeks Ended						Forty Weeks Ended
	November 3, 2008			November 5, 2007			November 3, 2008			November 5, 2007
Revenue:
Company-operated restaurants	$	255,545		$	273,319		$	880,858		$	941,639
Franchised and licensed restaurants and other		81,050			78,303			274,398			254,876
Total revenue		336,595			351,622			1,155,256			1,196,515
Operating costs and expenses:
Restaurant operating costs:
Food and packaging		76,785			82,298			262,214			279,761
Payroll and other employee benefits		71,237			78,261			250,349			273,901
Occupancy and other		61,841			62,459			199,687			207,706
Total restaurant operating costs		209,863			223,018			712,250			761,368
Franchised and licensed restaurants and other		61,474			60,373			210,131			197,685
Advertising		15,105			15,829			51,902			55,861
General and administrative		31,156			32,636			108,037			110,278
Facility action charges, net		1,242			287			2,666			(1,513	)
Total operating costs and expenses		318,840			332,143			1,084,986			1,123,679
Operating income		17,755			19,479			70,270			72,836
Interest expense		(9,363	)		(7,686	)		(16,330	)		(17,442	)
Other income, net		769			1,079			2,290			3,291
Income before income taxes and discontinued operations		9,161			12,872			56,230			58,685
Income tax expense		3,773			5,388			21,882			23,851
Income from continuing operations		5,388			7,484			34,348			34,834
Loss from discontinued operations (net of income tax (benefit) expense of $(500) and $1,841 for the twelve and forty weeks ended November 5, 2007, respectively)		—			(1,282	)		—			(3,856	)
Net income	$	5,388		$	6,202		$	34,348		$	30,978
Basic income per common share:
Continuing operations	$	0.10		$	0.13		$	0.66		$	0.57
Discontinued operations		—			(0.02	)		—			(0.06	)
Net income	$	0.10		$	0.11		$	0.66		$	0.51
Diluted income per common share:
Continuing operations	$	0.10		$	0.13		$	0.64		$	0.54
Discontinued operations		—			(0.02	)		—			(0.06	)
Net income	$	0.10		$	0.11		$	0.64		$	0.48
Dividends per common share	$	0.06		$	0.06		$	0.18		$	0.18
Weighted-average common shares outstanding:
Basic		52,574			55,908			51,898			61,312
Diluted		54,258			58,964			54,281			64,550

See Accompanying Notes to Condensed Consolidated Financial Statements

4

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except per share amounts)

(Unaudited)

	Forty Weeks Ended November 3, 2008
	Common Stock						Common Stock Held in Treasury						Additional Paid-In			Accumulated			Total Stockholders'
	Shares			Amount			Shares			Amount			Capital			Deficit			Equity
Balance at January 31, 2008		52,504		$	525			(28	)	$	(359	)	$	251,524		$	(106,448	)	$	145,242
Cash dividends declared ($0.18 per share)		—			—			—			—			—			(9,570	)		(9,570	)
Issuance of restricted stock awards, net of forfeitures		612			6			—			—			(6	)		—			—
Exercise of stock options		218			2			—			—			1,624			—			1,626
Conversion of 2023 Convertible Notes into common stock		1,787			18			—			—			15,149			—			15,167
Net tax deficiency from exercise of stock options and vesting of restricted stock awards		—			—			—			—			(298	)		—			(298	)
Share-based compensation expense		—			—			—			—			9,515			—			9,515
Repurchase and retirement of common stock		(477	)		(5	)		28			359			(4,381	)		—			(4,027	)
Net income		—			—			—			—			—			34,348			34,348
Balance at November 3, 2008		54,644		$	546			—		$	—		$	273,127		$	(81,670	)	$	192,003

See Accompanying Notes to Condensed Consolidated Financial Statements

5

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Forty Weeks Ended
	November 3, 2008			November 5, 2007
Cash flows from operating activities:
Net income	$	34,348		$	30,978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		48,141			49,679
Amortization and write-off of deferred loan fees		948			686
Share-based compensation expense		9,515			7,616
Change in fair value of interest rate swap agreements		658			1,839
Provision for (recovery of) losses on accounts and notes receivable		15			(693	)
Loss on sale of property and equipment and capital leases		1,914			3,706
Facility action charges, net		2,666			(2,218	)
Deferred income taxes		17,723			12,355
Other non-cash charges		28			39
Net changes in operating assets and liabilities:
Receivables, inventories, prepaid expenses and other current and non-current assets		6,226			943
Estimated liability for closed restaurants and estimated liability for self-insurance		(4,470	)		(4,211	)
Accounts payable and other current and long-term liabilities		(9,338	)		5,562
Net cash provided by operating activities		108,374			106,281
Cash flows from investing activities:
Purchases of property and equipment		(82,658	)		(101,692	)
Proceeds from sale of property and equipment		21,042			44,252
Collections of non-trade notes receivable		2,799			2,903
Disposition of La Salsa, net of cash surrendered		—			5,720
Other investing activities		68			58
Net cash used in investing activities		(58,749	)		(48,759	)
Cash flows from financing activities:
Net change in bank overdraft		(13,911	)		(5,979	)
Borrowings under revolving credit facility		133,500			306,500
Repayments of borrowings under revolving credit facility		(135,000	)		(303,000	)
Borrowings under credit facility term loan		—			200,179
Repayments of credit facility term loan		(15,815	)		(1,100	)
Repayments of other long-term debt		(131	)		(133	)
Net repayment by consolidated variable interest entity		—			(44	)
Repayments of capital lease obligations		(4,493	)		(4,200	)
Payment of deferred loan fees		(399	)		(1,279	)
Repurchase of common stock		(4,296	)		(233,803	)
Exercise of stock options		1,626			2,649
Excess tax benefits from exercise of stock options and vesting of restricted stock awards		174			1,616
Dividends paid on common stock		(9,449	)		(10,115	)
Net cash used in financing activities		(48,194	)		(48,709	)
Net increase in cash and cash equivalents		1,431			8,813
Cash and cash equivalents at beginning of period		19,993			18,680
Cash and cash equivalents at end of period	$	21,424		$	27,493

See Accompanying Notes to Condensed Consolidated Financial Statements

6

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 1 — Basis of Presentation and Description of Business

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

Carl’s Jr. restaurants are primarily located in the Western United States. Hardee’s restaurants are located throughout the Southeastern and Midwestern United States. 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 3, 2008, our system-wide restaurant portfolio consisted of:

	Carl’s Jr.		Hardee’s		Other		Total
Company-operated		412		490		1		903
Franchised and licensed		773		1,422		12		2,207
Total		1,185		1,912		13		3,110

Our accompanying unaudited Condensed Consolidated Financial Statements include the accounts of CKE, our wholly-owned subsidiaries, and certain variable interest entities for which we are the primary beneficiary and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the instructions to Form 10-Q, and Article 10 of Regulation S-X. 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, 2008. 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 has 13 four-week accounting periods and ends on the last Monday in January. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters have three periods, or 12 weeks. For clarity of presentation, we generally label all fiscal year ends as if the fiscal year ended January 31.

In our accompanying Condensed Consolidated Balance Sheet as of January 31, 2008, $865 was reclassified from other long-term liabilities to other current liabilities.  In our accompanying Condensed Consolidated Statement of Cash Flows for the forty weeks ended November 5, 2007, $1,839 was reclassified from net change in accounts payable and other current and long-term liabilities to change in fair value of interest rate swap agreements.

Note 2 — Accounting Pronouncements Not Yet Adopted and Adoption of New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurement. SFAS 157 for financial assets and liabilities is effective for fiscal years beginning after November 15, 2007. We have adopted the standard for those assets and liabilities as of the beginning of fiscal 2009 and there was no impact on our consolidated financial position or results of operations (see Note 5). In February 2008, the FASB deferred the effective date of SFAS 157 for one year for certain non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (i.e., at least annually). We are currently evaluating the impact of adopting SFAS 157 at the beginning of fiscal 2010 for non-financial assets and liabilities on our consolidated financial position and results of operations.

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (“SFAS 141R”), and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. SFAS 141R and SFAS 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both of the pronouncements are effective for periods beginning on or after December 15, 2008, which for us is the first quarter of fiscal 2010, and earlier adoption is prohibited. SFAS 141R will be applied to business combinations occurring after the effective date. SFAS 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. We do not anticipate the adoption of SFAS 141R and SFAS 160 will have any effect on our consolidated financial position and results of operations.

7

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and expands disclosures to include information about the fair value of derivatives, related credit risks and a company’s strategies and objectives for using derivatives. SFAS 161 is effective for fiscal periods beginning on or after November 15, 2008, which for us is the first quarter of fiscal 2010.

In April 2008, the FASB issued FASB Staff Position (“FSP”) 142-3, Determination of the Useful Life of Intangible Assets, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal periods beginning after December 15, 2008, which for us is the first quarter of fiscal 2010. We do not expect the adoption of FSP 142-3 to have a material effect on our consolidated financial position and results of operations.

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP.  SFAS 162 became effective on November 15, 2008, subsequent to the end of our third quarter of fiscal 2009.  Our adoption of SFAS 162 in our fourth quarter of fiscal 2009 had no impact on our consolidated financial position or results of operations.

In June 2008, the FASB ratified Emerging Issues Task Force (“EITF”) 08-3, Accounting by Lessees for Maintenance Deposits, which provides guidance for accounting for maintenance deposits paid by a lessee to a lessor. EITF 08-3 is effective for fiscal periods beginning after December 15, 2008, which for us is the first quarter of fiscal 2010. We do not expect the adoption of EITF 08-3 to have any effect on our consolidated financial position and results of operations.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and should be included in the computation of earnings per share pursuant to the two-class method. This FSP is effective for fiscal periods beginning after December 15, 2008, which for us is the first quarter of fiscal 2010. We expect the adoption of FSP EITF 03-6-1 to impact the amount of our previously-reported earnings per share, but have not yet determined the amount.

Note 3 — Assets Held For Sale

Surplus restaurant properties and company-operated restaurants that we expect to sell within one year are classified in our accompanying Condensed Consolidated Balance Sheets as assets held for sale. As of November 3, 2008, total assets held for sale were $556. This was comprised of two surplus properties in our Hardee’s operating segment. As of January 31, 2008, total assets held for sale were $1,038 and were comprised of four surplus properties in our Hardee’s operating segment.

Note 4 — Indebtedness and Interest Expense

As of November 3, 2008, we had borrowings outstanding of $252,410 under the term loan portion and borrowings outstanding of $65,000 under the revolving portion of our senior credit facility (“Facility”). In addition, we had outstanding letters of credit totaling $35,893 and remaining availability of $99,107, under the revolving portion of our Facility. The principal amount of the term loan is scheduled to be repaid in quarterly installments of $675 through January 1, 2012; three quarterly payments of $64,175, beginning on April 1, 2012; and a final payment of $51,110 due on January 1, 2013. The Facility also requires annual principal payments on the term loan based on excess cash flows, as defined. We made aggregate principal payments of $675 and $15,815 on the term loan, including a payment of $13,790 based on excess cash flows for fiscal 2008, during the twelve and forty weeks ended November 3, 2008, respectively.  The revolving portion of our Facility matures on March 17, 2012.

8

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

As of November 3, 2008, the borrowings outstanding under the revolving portion of our Facility bore interest at a weighted-average interest rate of 4.70% per annum. As of November 3, 2008, our term loan debt had a nominal weighted-average interest rate of 5.69% per annum; however, we have fixed rate swap agreements (which were amended effective September 10, 2008) with various counterparties to effectively fix future interest payments on $200,000 of our term loan debt at 6.12%. These agreements will expire March 12, 2012.  These derivative instruments were not designated as cash flow hedges under the terms of SFAS 133. Accordingly, the change in the fair value of the interest rate swap agreements is recognized in interest expense in our Condensed Consolidated Statements of Income.  During the twelve and forty weeks ended November 3, 2008, we paid $1,474 and $1,690, respectively, for net settlements under our fixed rate swap agreements. The fair value of the interest rate swap agreements, inclusive of unpaid periodic settlements, is included in other current liabilities and other long-term liabilities, in our accompanying Condensed Consolidated Balance Sheets, and was $10,348 and $11,380 as of November 3, 2008 and January 31, 2008, respectively. Subsequent to November 3, 2008, we paid a periodic settlement of $575. As a matter of policy, we do not enter into derivative instruments unless there is an underlying exposure.

Our Facility permits us to make annual capital expenditures in the amount of $85,000, plus 80% of the amount of actual Adjusted EBITDA (as defined in our Facility) in excess of $150,000. In addition, we may reinvest proceeds from the sale of assets and carry forward certain unused capital expenditure amounts to the following year. Our Facility also contains financial performance covenants, which include a maximum leverage ratio.

Effective August 11, 2008, the cumulative dividends declared since the most recent conversion rate adjustment resulted in a 1.0404% change in the conversion rate per $1 of the Convertible Subordinated Notes due 2023 (“2023 Convertible Notes”), from the previous conversion rate of 116.6063 to an adjusted conversion rate of 117.8195.  As a result of the conversion rate adjustment, the previous conversion price of approximately $8.58 was adjusted to a conversion price of approximately $8.49.  On August 29, 2008, we notified the holders of the 2023 Convertible Notes that we would redeem all outstanding notes on October 1, 2008.  During the twelve weeks ended November 3, 2008, we redeemed and converted the remaining $15,167 of our 2023 Convertible Notes into 1,786,963 shares of our common stock. We also paid $303 for accrued interest and partial shares.  The $15,167 of 2023 Convertible Notes has been included in current portion of bank indebtedness and other long-term debt in our accompanying Condensed Consolidated Balance Sheet as of January 31, 2008.

Interest expense consisted of the following:

	Twelve Weeks Ended				Forty Weeks Ended
	November 3, 2008		November 5, 2007		November 3, 2008		November 5, 2007
Facility	$	2,864	$	4,147	$	10,216	$	9,799
Interest rate swaps		4,911		1,839		658		1,839
Capital lease obligations		1,039		1,171		3,418		3,903
2023 Convertible Notes		81		140		404		466
Amortization of loan fees		244		187		847		679
Letter of credit fees and other		224		202		787		756
	$	9,363	$	7,686	$	16,330	$	17,442

9

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 5 — Fair Value Measurement

We adopted SFAS 157 for financial assets and liabilities as of the beginning of fiscal 2009. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 -	Quoted prices in active markets for identical assets or liabilities;
Level 2 -	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 -	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of November 3, 2008:

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Interest rate swap agreements	$	10,348	$	—	$	10,348	$	—

The interest rate swap agreements are recorded at fair value based upon valuation models as reported by our counterparties. These valuation models are based upon relevant factors such as the contractual terms of our interest rate swap agreements and interest rate curves.

Note 6 — Commitments and Contingent Liabilities

Under various past and present 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 and licensed restaurants and other revenue, and the payments on the leases as rental expense in franchised and licensed restaurants and other expense, in our accompanying Condensed Consolidated Statements of Income. As of November 3, 2008, the present value of the lease obligations under the remaining master leases’ primary terms is $118,980. 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 $1,075, of which $85 is reserved for in our estimated liability for closed restaurants in our accompanying Condensed Consolidated Balance Sheet as of November 3, 2008. In addition to the sublease arrangements with franchisees described above, we also lease land and buildings to franchisees. As of November 3, 2008, the net book value of property under lease to Hardee’s and Carl’s Jr. franchisees was $26,169 and $3,266, respectively.

10

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Pursuant to our Facility, a letter of credit sub-facility in the amount of $85,000 was established (see Note 4). Several standby letters of credit are outstanding under this sub-facility, which 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 3, 2008, we had outstanding letters of credit of $35,893, expiring at various dates through February 2010.

As of November 3, 2008, we had unconditional purchase obligations in the amount of $70,459, which consist primarily of contracts for goods and services related to restaurant operations and contractual commitments for marketing and sponsorship arrangements.

We have employment agreements with certain key executives (“Agreements”). These Agreements include provisions for lump sum payments to the executives that may be triggered by the termination of employment under certain conditions, as defined in each Agreement. If such provisions were triggered, each affected executive would receive an amount ranging from one to three times his base salary for the remainder of his employment term plus, in some instances, an amount ranging from a pro-rata portion of the current year bonus to three times the bonus in effect for the year in which the termination occurs. Additionally, all options awarded to the affected executives which have not vested as of the date of termination would vest immediately. For certain of the key executives, all unvested restricted stock awards as of the date of termination would vest immediately and restricted stock awards which have not yet been awarded would be awarded and would vest immediately. If all of these Agreements had been triggered as of November 3, 2008, we would have been required to make cash payments of approximately $16,416.

We are, from time to time, the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect us and our restaurants, regardless of whether such allegations are valid or whether we are liable. We are also, at times, the subject of complaints or allegations from current or former employees, franchisees, vendors, landlords and others.

As of November 3, 2008, we had recorded an accrued liability for contingencies related to litigation in the amount of $208, which relates to certain employment, real estate and other business disputes. Certain of the matters for which we maintain an accrued liability for litigation pose risk of loss significantly above the accrued amounts. In addition, as of November 3, 2008, we estimated the contingent liability of those losses related to other litigation claims that, in accordance with SFAS 5, Accounting for Contingencies, are not accrued, but that we believe are reasonably possible to result in an adverse outcome, to be in the range of $1,030 to $3,045.

Note 7 — Stockholders’ Equity

Repurchase of Common Stock

Pursuant to a program (“Stock Repurchase Plan”) authorized by our Board of Directors, we are allowed to repurchase up to an aggregate of $400,000 of our common stock.  The following table summarizes the repurchase of common stock for the twelve and forty weeks ended November 3, 2008:

	Twelve Weeks		Forty Weeks
Common shares repurchased		339,038		449,600
Average price per share	$	7.89	$	8.96
Total cost, including trading commissions	$	2,675	$	4,027
Common shares retired		339,038		477,400

As of November 3, 2008, there were no shares of common stock that had been repurchased, but not yet retired.  As of January 31, 2008, we had 27,800 shares of common stock that had been repurchased, but not yet retired, and are shown as common stock held in treasury in our accompanying Condensed Consolidated Balance Sheet. These shares were retired subsequent to January 31, 2008.

Based on the Board of Directors’ authorization and the amount of cumulative repurchases of our common stock that we have already made thereunder (21,727,856 shares at an average price of $16.63 per share, for a total cost, including trading commissions, of $361,280), we are permitted to make additional repurchases of our common stock up to $38,720 under the Stock Repurchase Plan as of November 3, 2008.

Dividends

During the forty weeks ended November 3, 2008, we declared cash dividends of $0.18 per share of common stock, for a total of $9,580. Dividends payable of $3,279 and $3,148 have been included in other current liabilities in our accompanying Condensed Consolidated Balance Sheets as of November 3, 2008 and January 31, 2008, respectively. The dividends declared during the twelve weeks ended November 3, 2008 were subsequently paid on November 24, 2008.

 Subsequent to November 3, 2008, we declared cash dividends of $0.06 per share of common stock, payable to the stockholders of record as of January 26, 2009.

11

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 8 — Share-Based Compensation

We have various share-based compensation plans that provide restricted stock awards and stock options for certain employees, non-employee directors and external service providers to acquire shares of our common stock. The total number of shares available under all of our stock incentive plans was 3,380,707 as of November 3, 2008.

Total share-based compensation expense and associated tax benefits recognized under SFAS 123R were as follows:

	Twelve Weeks Ended				Forty Weeks Ended
	November 3, 2008		November 5, 2007		November 3, 2008		November 5, 2007
Share-based compensation expense related to performance-vested restricted stock awards	$	993	$	1,283	$	3,271	$	2,188
All other share-based compensation expense		1,665		1,567		6,253		5,567
Total share-based compensation expense	$	2,658	$	2,850	$	9,524	$	7,755
Associated tax benefits	$	760	$	654	$	2,794	$	1,969

Note 9 — Facility Action Charges, Net

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

	Twelve Weeks Ended					Forty Weeks Ended
	November 3, 2008		November 5, 2007			November 3, 2008			November 5, 2007
Estimated liability for new restaurant closures	$	10	$	51		$	601		$	221
Adjustments to estimated liability for closed restaurants		370		61			73			645
Impairment of assets to be disposed of		35		105			1,150			485
Impairment of assets to be held and used		96		—			876			496
Loss (gain) on sales of restaurants and surplus properties, net		627		(46	)		(393	)		(3,779	)
Amortization of discount related to estimated liability for closed restaurants		104		116			359			419
	$	1,242	$	287		$	2,666		$	(1,513	)

Note 10 — Income Taxes

Income tax expense consisted of the following:

	Twelve Weeks Ended						Forty Weeks Ended
	November 3, 2008			November 5, 2007			November 3, 2008			November 5, 2007
Federal and state income taxes	$	3,384		$	5,145		$	20,642		$	23,011
Foreign income taxes		389			243			1,240			840
Income tax expense	$	3,773		$	5,388		$	21,882		$	23,851
Effective income tax rate		41.2	%		41.9	%		38.9	%		40.6	%

Our effective income tax rates for the twelve and forty weeks ended November 3, 2008 and November 5, 2007 differ from the federal statutory rate primarily as a result of state income taxes and certain expenses that are nondeductible for income tax purposes. During the forty weeks ended November 3, 2008, our income tax expense was reduced by $1,273 as a result of the impact of recent tax regulations. We had $3,784 and $4,554 of tax benefits as of November 3, 2008 and January 31, 2008, respectively, that, if recognized, would affect our effective income tax rate. As of November 3, 2008 and January 31, 2008, we also had $13,860 and $14,824, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes, income taxes payable and valuation allowance.

As of November 3, 2008, we maintained a valuation allowance of $28,105 for state capital loss carryforwards, certain state net operating loss and income tax credit carryforwards and other temporary differences related to various states in which one or more of our entities file separate income tax returns. Realization of the tax benefit of such deferred income tax assets may remain uncertain for the foreseeable future, even though we expect to generate taxable income, since they are subject to various limitations and may only be used to offset income of certain entities or of a certain character.

12

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 11 — Income Per Share

The table below presents the computation of basic and diluted earnings per share for the twelve and forty weeks ended November 3, 2008 and November 5, 2007:

	Twelve Weeks Ended					Forty Weeks Ended
	November 3, 2008		November 5, 2007			November 3, 2008		November 5, 2007
	(In thousands except per share amounts)
Numerator:
Income from continuing operations	$	5,388	$	7,484		$	34,348	$	34,834
Loss from discontinued operations		—		(1,282	)		—		(3,856	)
Net income for computation of basic earnings per share	$	5,388	$	6,202		$	34,348	$	30,978
Adjustment for interest and amortization costs for 2023 Convertible Notes, net of related tax effect		56		102			292		341
Income from continuing operations for computation of diluted earnings per share	$	5,444	$	7,586		$	34,640	$	35,175
Net income for computation of diluted earnings per share	$	5,444	$	6,304		$	34,640	$	31,319
Denominator:
Weighted-average shares for computation of basic earnings per share		52,574		55,908			51,898		61,312
Dilutive effect of stock options and restricted stock		680		1,309			838		1,491
Dilutive effect of 2023 Convertible Notes		1,004		1,747			1,545		1,747
Weighted-average shares for computation of diluted earnings per share		54,258		58,964			54,281		64,550
Basic earnings per share:
Basic income per share from continuing operations	$	0.10	$	0.13		$	0.66	$	0.57
Basic loss per share from discontinued operations		—		(0.02	)		—		(0.06	)
Basic net income per share	$	0.10	$	0.11		$	0.66	$	0.51
Diluted earnings per share:
Diluted income per share from continuing operations	$	0.10	$	0.13		$	0.64	$	0.54
Diluted loss per share from discontinued operations		—		(0.02	)		—		(0.06	)
Diluted net income per share	$	0.10	$	0.11		$	0.64	$	0.48

The following table presents the number of potentially dilutive shares excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive for the twelve and forty weeks ended November 3, 2008 and November 5, 2007:

	Twelve Weeks Ended				Forty Weeks Ended
	November 3, 2008		November 5, 2007		November 3, 2008		November 5, 2007
Stock options and restricted stock		3,630		1,344		3,249		1,155

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, 2008).

13

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

	Carl’s Jr.		Hardee’s		Other			Total
Twelve Weeks Ended November 3, 2008
Revenue	$	199,314	$	137,066	$	215		$	336,595
Operating income		12,871		4,801		83			17,755
Income (loss) before income taxes and discontinued operations		12,769		3,773		(7,381	)		9,161

	Carl’s Jr.		Hardee’s		Other			Total
Twelve Weeks Ended November 5, 2007
Revenue	$	192,609	$	158,004	$	1,009		$	351,622
Operating income		14,570		4,599		310			19,479
Income (loss) before income taxes and discontinued operations		14,326		2,917		(4,371	)		12,872

	Carl’s Jr.		Hardee’s		Other			Total
Forty Weeks Ended November 3, 2008
Revenue	$	686,380	$	468,195	$	681		$	1,155,256
Operating income		53,594		16,394		282			70,270
Income (loss) before income taxes and discontinued operations		52,912		12,692		(9,374	)		56,230

	Carl’s Jr.		Hardee’s		Other			Total
Forty Weeks Ended November 5, 2007
Revenue	$	647,983	$	545,295	$	3,237		$	1,196,515
Operating income		51,058		21,468		310			72,836
Income (loss) before income taxes and discontinued operations		50,293		15,736		(7,344	)		58,685

Note 13 — Discontinued Operations

We sold our La Salsa Fresh Mexican Grill restaurants and the related franchise operations to LAS Acquisition, LLC (“Buyer”) on July 16, 2007. Under the agreement, Santa Barbara Restaurant Group, Inc., a wholly-owned subsidiary of the Company, sold its 100 percent equity interest in La Salsa, Inc. and La Salsa of Nevada, Inc. for adjusted consideration of $15,889. Pursuant to the agreement, we have retained contingent liabilities related to tax matters and certain litigation matters arising prior to the completion of the sale of La Salsa. During the forty weeks ended November 3, 2008, we received payments totaling $2,600 from Buyer, and the remaining $4,026 note is included in accounts receivable, net, in our accompanying Condensed Consolidated Balance Sheet as of November 3, 2008.

The results from discontinued operations for the twelve and forty weeks ended November 5, 2007 were as follows:

	Twelve Weeks Ended			Forty Weeks Ended
Revenue	$	--		$	20,907
Operating loss		--			(724	)
Interest expense		--			(22	)
Other income, net		--			92
Income tax benefit		--			173
		--			(481	)
Loss on disposal of La Salsa		(1,782	)		(1,361	)
Income tax expense related to disposal of La Salsa		500			(2,014	)
Net loss on disposal of La Salsa		(1,282	)		(3,375	)
Loss from discontinued operations	$	(1,282	)	$	(3,856	)

14

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 14 — Purchase and Sale of Assets

Hardee’s Refranchising Program

During fiscal 2008, we launched a refranchising program for our Hardee’s concept. During the twelve weeks ended November 3, 2008, we sold 23 company-operated Hardee’s restaurants and related real property with a net book value of $2,560 to one franchisee. In connection with this transaction, we received aggregate consideration of $4,075, including $605 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net loss of $1,070 which is included in facility action charges, net, in our Hardee’s segment.  During the forty weeks ended November 3, 2008, we sold 88 company-operated Hardee’s restaurants and related real property with a net book value of $12,682 to three franchisees. In connection with these transactions, we received aggregate consideration of $16,428, including $2,290 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net loss of $1,682, which is included in facility action charges, net, in our accompanying Condensed Consolidated Statement of Income for the forty weeks ended November 3, 2008, in our Hardee’s segment. As part of these transactions, the franchisees acquired the real property and/or subleasehold interest in the real property related to the restaurant locations.

Related Party Transaction

During the forty weeks ended November 3, 2008, we sold three company-operated Carl’s Jr. restaurants and related real property with a net book value of $1,068 to a former executive and new franchisee. In connection with this transaction, we received aggregate consideration of $2,173, including $100 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net gain of $983, which is included in facility action charges, net, in our accompanying Condensed Consolidated Statements of Income for the forty weeks ended November 3, 2008, in our Carl’s Jr. segment. As part of this transaction, the franchisee acquired the real property and/or subleasehold interest in the real property related to the restaurant locations.

Note 15 — Termination of a Franchise Agreement

  During the forty weeks ended November 3, 2008, we terminated our franchise agreement and subleases with a Hardee’s franchisee as a result of its inability to remedy, on a timely basis, certain defaults under the terms of the agreements. As a result, we assumed full operational control of their 32 open restaurants, six of which were closed during the twelve weeks ended November 3, 2008. 12 of the affected restaurants are located on leased premises that we sublet to the franchisee. The remaining 14 are leased by the former franchisee from third parties and, although we are operating the restaurants, we have not assumed any of the lease rights or obligations for those properties. If we are unable to negotiate acceptable lease terms for any of the leased locations, we may decide to close the restaurants.

Note 16 — Supplemental Cash Flow Information

	Forty Weeks Ended
	November 3, 2008		November 5, 2007
Cash paid for:
Interest, net of amounts capitalized	$	17,476	$	16,690
Income taxes, net of refunds received	$	1,863	$	6,837
Non-cash investing and financing activities:
Gain recognized on sale and leaseback transactions	$	264	$	266
Dividends declared, not paid	$	3,279	$	3,304
Capital lease obligation incurred to acquire assets	$	761	$	—

        During the forty weeks ended November 3, 2008, we redeemed and converted the remaining $15,167 of our 2023 Convertible Notes into 1,786,963 shares of our common stock (see Note 4).

15

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Safe Harbor Disclosure

CKE Restaurants, Inc. and its subsidiaries (collectively referred to as the “Company”) is comprised of the operations of Carl’s Jr., Hardee’s, Green Burrito (which is primarily operated as a dual-branded concept with Carl’s Jr. quick-service restaurants) and Red Burrito (which is operated as a dual-branded concept with Hardee’s quick-service restaurants). The following Management’s Discussion and Analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements contained herein, and our Annual Report on Form 10-K for the fiscal year ended January 31, 2008.

Matters discussed in this Form 10-Q contain forward-looking statements relating to future plans and developments, financial goals and operating performance that are based on our current beliefs and assumptions. Such statements are subject to risks and uncertainties that are often difficult to predict, are beyond our control and which may cause results to differ materially from expectations. Factors that could cause our results to differ materially from those described include, but are not limited to, whether or not restaurants will be closed and the number of restaurant closures, consumers’ concerns or adverse publicity regarding our products, the effectiveness of operating initiatives and advertising and promotional efforts (particularly at the Hardee’s brand), changes in economic conditions or prevailing interest rates, changes in the price or availability of commodities, availability and cost of energy, workers’ compensation and general liability premiums and claims experience, changes in our suppliers’ ability to provide quality and timely products to us, delays in opening new restaurants or completing remodels, severe weather conditions, the operational and financial success of our franchisees, franchisees’ willingness to participate in our strategies, the availability of financing for us and our franchisees, unfavorable outcomes in litigation, changes in accounting policies and practices, effectiveness of internal controls over financial reporting, new legislation or government regulation (including environmental laws), the availability of suitable locations and terms for the sites designated for development, and other factors as discussed in our filings with the Securities and Exchange Commission ("SEC").

Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law or the rules of the New York Stock Exchange.

New Accounting Pronouncements Not Yet Adopted and Adoption of New Accounting Pronouncements

See Note 2 of Notes to Condensed Consolidated Financial Statements for a description of the new accounting pronouncements that we have and have not yet adopted.

Critical Accounting Policies

Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our consolidated financial position and results of operations. See our Annual Report on Form 10-K for the year ended January 31, 2008 for a description of our critical accounting policies. Specific risks associated with these critical accounting policies are described in the following paragraphs.

Impairment of Property and Equipment and Other Amortizable Long-Lived Assets Held and Used, Held for Sale or To Be Disposed of Other Than By Sale

In connection with analyzing long-lived assets to determine if they have been impaired, we estimate future cash flows for each of our restaurants based upon experience gained, current intentions about refranchising restaurants and closures, expected sales trends, internal plans and other relevant information. These estimates utilize key assumptions, such as same-store sales and the rates at which restaurant operating costs will increase in the future. If our same-store sales do not perform at or above our forecasted level, or if restaurant operating cost increases exceed our forecast and we are unable to recover such costs through price increases, the carrying value of certain of our restaurants may prove to be unrecoverable and we may incur additional impairment charges in the future.

16

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Impairment of Goodwill

During the first quarter of fiscal 2009, we evaluated the Carl’s Jr. brand, the only one of our reporting units for which goodwill is recorded. As a result of our annual impairment test, we concluded that the fair value of the net assets of Carl’s Jr. exceeded the carrying value, and thus no impairment charge was required. As of November 3, 2008, we had $22,649 in goodwill recorded in our accompanying Condensed Consolidated Balance Sheet.

Estimated Liability for Closed Restaurants

In determining the amount of the estimated liability for closed restaurants, we estimate the cost to maintain vacant leased properties until the lease can be abated. If the costs to maintain properties increase, or it takes longer than anticipated to sublease or terminate leases, we may need to record additional estimated liabilities. If the leases on the vacant restaurants are not terminated or subleased on the terms that we used to estimate the liabilities, we may be required to record losses in future periods. Conversely, if the leases on the vacant restaurants are terminated or subleased on more favorable terms than we used to estimate the liabilities, we reverse previously established estimated liabilities, resulting in an increase in operating income.

Estimated Liability for Self-Insurance

If we experience a higher than expected number of claims or the costs of claims rise more than the estimates used by management, developed with the assistance of our actuary, our reserves would require adjustment and we would be required to adjust the expected losses upward and increase our future self-insurance expense.

Our actuary provides us with estimated unpaid losses for each loss category, upon which our analysis is based. As of November 3, 2008, our estimated liability for self-insured workers’ compensation, general and auto liability losses was $35,617.

Franchised and Licensed Operations

We have sublease agreements with some of our franchisees on properties for which we remain principally liable for the lease obligations. 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. The likelihood of needing to increase the estimated liability for future lease obligations is primarily related to the success of our Hardee’s concept, although we can provide no assurance that our Carl’s Jr. franchisees will not experience a similar level of financial difficulties as our Hardee’s franchisees.

Income Taxes

When necessary, we record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized. In considering the need for a valuation allowance against some portion or all of our deferred tax assets, we must make certain estimates and assumptions regarding future taxable income, the feasibility of tax planning strategies and other factors. Changes in facts and circumstances or in the estimates and assumptions that are involved in establishing and maintaining a valuation allowance against deferred tax assets could result in adjustments to the valuation allowance in future quarterly or annual periods.

We use an estimate of our annual income tax rate to recognize a provision for income taxes in financial statements for interim periods. However, changes in facts and circumstances could result in adjustments to our effective tax rate in future quarterly or annual periods.

17

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2009 Comparisons with Fiscal 2008

The factors discussed below impact comparability of operating performance for the twelve and forty weeks ended November 3, 2008 and November 5, 2007, or could impact comparisons for the remainder of fiscal 2009.

Fiscal Year and Seasonality

We operate on a retail accounting calendar. Our fiscal year has 13 four-week accounting periods and ends the last Monday in January. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters 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 upon school vacations and improved weather conditions, which affect the public’s dining habits.

Operating Review

The following table sets forth the percentage relationship to total revenue, unless otherwise indicated, of certain items included in our accompanying Condensed Consolidated Statements of Income:

	Twelve Weeks Ended						Forty Weeks Ended
	November 3, 2008			November 5, 2007			November 3, 2008			November 5, 2007
Revenue:
Company-operated restaurants		75.9	%		77.7	%		76.2	%		78.7	%
Franchised and licensed restaurants and other		24.1			22.3			23.8			21.3
Total revenue		100.0			100.0			100.0			100.0
Operating costs and expenses:
Restaurant operating costs (1):
Food and packaging		30.0			30.1			29.8			29.7
Payroll and other employee benefits		27.9			28.6			28.4			29.1
Occupancy and other		24.2			22.9			22.7			22.1
Total restaurant operating costs		82.1			81.6			80.9			80.9
Franchised and licensed restaurants and other (2)		75.8			77.1			76.6			77.6
Advertising (1)		5.9			5.8			5.9			5.9
General and administrative		9.3			9.3			9.4			9.2
Facility action charges, net		0.4			0.1			0.2			(0.1	)
Operating income		5.3			5.5			6.1			6.1
Interest expense		(2.8	)		(2.2	)		(1.4	)		(1.5	)
Other income, net		0.2			0.3			0.2			0.3
Income before income taxes and discontinued operations		2.7			3.7			4.9			4.9
Income tax expense		1.1			1.5			1.9			2.0
Income from continuing operations		1.6	%		2.1	%		3.0	%		2.9	%

____________

(1) As a percent of company-operated restaurants revenue.

(2) As a percent of franchised and licensed restaurants and other revenue.

18

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

The following table is presented to facilitate Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	Twelve Weeks Ended				Forty Weeks Ended
	November 3, 2008		November 5, 2007		November 3, 2008		November 5, 2007
Company-operated restaurants revenue	$	255,545	$	273,319	$	880,858	$	941,639
Restaurant operating costs:
Food and packaging		76,785		82,298		262,214		279,761
Payroll and other employee benefits		71,237		78,261		250,349		273,901
Occupancy and other		61,841		62,459		199,687		207,706
Total restaurant operating costs		209,863		223,018		712,250		761,368
Franchised and licensed restaurants and other revenue:
Royalties		19,592		17,311		64,757		57,958
Distribution centers		51,858		50,995		178,693		167,535
Rent		8,257		6,998		26,105		22,969
Retail sales of variable interest entity		—		807		—		2,593
Franchise fees		1,343		2,192		4,843		3,821
Total franchised and licensed restaurants and other revenue		81,050		78,303		274,398		254,876
Franchised and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)		3,236		2,833		11,145		9,185
Distribution centers		51,955		51,023		178,518		167,505
Rent and other occupancy		6,283		5,753		20,468		18,491
Operating costs of variable interest entity		—		764		—		2,504
Total franchised and licensed restaurants and other expenses		61,474		60,373		210,131		197,685
Advertising		15,105		15,829		51,902		55,861
General and administrative		31,156		32,636		108,037		110,278
Facility action charges, net		1,242		287		2,666		(1,513	)
Operating income	$	17,755	$	19,479	$	70,270	$	72,836

The following table shows the change in our restaurant portfolio for the twelve and forty weeks ended November 3, 2008:

	Twelve Weeks Ended									Forty Weeks Ended
	Company- operated			Franchised and Licensed			Total			Company- operated			Franchised and Licensed			Total
Open at beginning of period		928			2,172			3,100			967			2,116			3,083
New		8			24			32			16			70			86
Closed		(10	)		(12	)		(22	)		(21	)		(38	)		(59	)
Divested		(23	)		—			(23	)		(91	)		(32	)		(123	)
Acquired		—			23			23			32			91			123
Open at November 3, 2008		903			2,207			3,110			903			2,207			3,110

19

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Carl’s Jr.

	Twelve Weeks Ended						Forty Weeks Ended
	November 3, 2008			November 5, 2007			November 3, 2008			November 5, 2007
Company-operated restaurants revenue	$	140,307		$	135,849		$	482,669		$	455,971
Restaurant operating costs:
Food and packaging		41,319			39,642			141,753			132,820
Payroll and other employee benefits		36,842			35,484			128,343			122,880
Occupancy and other		34,024			31,976			110,130			102,319
Total restaurant operating costs		112,185			107,102			380,226			358,019
Franchised and licensed restaurants and other revenue:
Royalties		7,623			7,221			26,003			24,413
Distribution centers		45,984			44,079			159,876			149,330
Rent		4,957			5,067			16,315			17,074
Franchise fees		443			393			1,517			1,195
Total franchised and licensed restaurants and other revenue		59,007			56,760			203,711			192,012
Franchised and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)		1,677			1,316			5,553			4,522
Distribution centers		45,966			44,059			159,297			149,148
Rent and other occupancy		4,326			4,287			14,191			14,469
Total franchised and licensed restaurants and other expenses		51,969			49,662			179,041			168,139
Advertising		8,436			8,143			28,557			26,949
General and administrative		13,524			12,898			45,802			42,868
Facility action charges, net		329			234			(840	)		950
Operating income	$	12,871		$	14,570		$	53,594		$	51,058
Company-operated average unit volume (trailing-13 periods)	$	1,529		$	1,486
Franchise-operated average unit volume (trailing-13 periods)	$	1,192		$	1,201
Company-operated same-store sales increase		0.5	%		0.7	%		2.9	%		0.8	%
Franchise-operated same-store sales decrease		(2.2	)%		(1.3	)%		(1.0	)%		(0.1	)%
Company-operated same-store transaction decrease		(4.3	)%		(1.2	)%		(0.6	)%		(3.1	)%
Average check (actual $)	$	7.07		$	6.62		$	7.02		$	6.73
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging		29.4	%		29.2	%		29.4	%		29.1	%
Payroll and other employee benefits		26.3	%		26.1	%		26.6	%		26.9	%
Occupancy and other		24.2	%		23.5	%		22.8	%		22.4	%
Total restaurant operating costs		80.0	%		78.8	%		78.8	%		78.5	%
Advertising as a percentage of company-operated restaurants revenue		6.0	%		6.0	%		5.9	%		5.9	%

20

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

The following table shows the change in our restaurant portfolio for the twelve and forty weeks ended November 3, 2008:

	Twelve Weeks Ended									Forty Weeks Ended
	Company- operated			Franchised and licensed			Total			Company- operated			Franchised and licensed			Total
Open at beginning of period		408			762			1,170			406			735			1,141
New		6			15			21			11			40			51
Closed		(2	)		(4	)		(6	)		(2	)		(5	)		(7	)
Divested		—			—			—			(3	)		—			(3	)
Acquired		—			—			—			—			3			3
Open at November 3, 2008		412			773			1,185			412			773			1,185

Company-Operated Restaurants

Revenue from company-operated Carl’s Jr. restaurants increased $4,458, or 3.3%, to $140,307 during the twelve weeks ended November 3, 2008, as compared to the twelve weeks ended November 5, 2007. This increase was primarily due to a $43 increase in average unit volume, which reached $1,529, an increase in same-store sales of 0.5%, and the opening of 18 new company-operated restaurants since the end of the third quarter of fiscal 2008, partially offset by three restaurants divested to a franchisee and four closed company-operated restaurants.

Revenue from company-operated Carl’s Jr. restaurants increased $26,698, or 5.9%, to $482,669 during the forty weeks ended November 3, 2008, as compared to the forty weeks ended November 5, 2007. This increase is mainly due to the $43 increase in average unit volume, a 2.9% increase in same-store sales, and the net impact of the changes in our company-operated restaurant portfolio discussed above. We believe our average unit volume and same-store sales increases are primarily due to increased sales resulting from recent restaurant remodeling and our continued focus on offering premium products that compete based on quality, innovation and taste.

The changes in the restaurant operating costs as a percentage of company-operated restaurants revenue are explained as follows:

	Twelve Weeks			Forty Weeks
Restaurant operating costs as a percentage of company-operated restaurants revenue for the period ended November 5, 2007		78.8	%		78.5	%
Increase in utilities expense		0.5			0.4
Increase in depreciation and amortization expense		0.4			0.4
Increase (decrease) in workers’ compensation expense		0.2			(0.4	)
Increase in rent expense		0.3			—
Increase in food and packaging costs		0.2			0.3
Decrease in supplies and uniforms expense		(0.2	)		—
Decrease in repairs and maintenance		—			(0.2	)
Other, net		(0.2	)		(0.2	)
Restaurant operating costs as a percentage of company-operated restaurants revenue for the period ended November 3, 2008		80.0	%		78.8	%

Utilities expense increased as a percent of company-operated restaurants revenue during the twelve and forty weeks ended November 3, 2008, from the comparable prior year periods, mainly due to rate increases for natural gas and electricity.

Depreciation and amortization expense as a percent of company-operated restaurants revenue increased during the twelve and forty weeks ended November 3, 2008, from the comparable prior year periods, mainly due to increased restaurant remodel activity.

21

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Workers’ compensation expense decreased as a percent of company-operated restaurants revenue during the forty weeks ended November 3, 2008, from the comparable prior year period due primarily to the impact of an increase of $2,487 in our self-insured workers’ compensation liability in the prior year period related to a single claim from 1982.

        Rent expense increased as a percent of company-operated restaurants revenue during the twelve weeks ended November 3, 2008, as compared to the prior year period, due mainly to rental rate increases resulting from Consumer Price Index adjustments.

Food and packaging costs as a percent of company-operated restaurants revenue increased during the forty weeks ended November 3, 2008, as compared to the prior year period, due primarily to higher commodity costs for beef, pork, cheese, potato and oil products. In addition, during the forty weeks ended November 5, 2007, we recognized vendor credits related to previously purchased inventories that did not recur in the current year period.

Franchised and Licensed Restaurants

Total franchised and licensed restaurants and other revenue increased $2,247, or 4.0%, to $59,007 during the twelve weeks ended November 3, 2008, as compared to the twelve weeks ended November 5, 2007. Distribution center sales of food, paper and supplies to franchisees increased by $1,905, or 4.3%, primarily due to the increase in the franchise store base over the comparable prior year period and an increase in the cost of food, paper and supplies, upon which the sales price of those items is based. Franchise royalties grew $402, or 5.6%, during the twelve weeks ended November 3, 2008, as compared to the twelve weeks ended November 5, 2007, due to the net increase of 53 domestic and international franchised and licensed restaurants during the trailing-13 periods ended November 3, 2008.

Total franchised and licensed restaurants and other revenue increased $11,699, or 6.1%, to $203,711 during the forty weeks ended November 3, 2008, as compared to the forty weeks ended November 5, 2007. Distribution center sales of food, paper and supplies to franchisees increased by $10,546, or 7.1%, primarily due to the increase in the franchise store base over the comparable prior year period and an increase in the cost of food, paper and supplies, upon which the sales price of those items is based. Franchise royalties grew $1,590, or 6.5%, during the forty weeks ended November 3, 2008, as compared to the forty weeks ended November 5, 2007, due to the increase in domestic and international franchised and licensed restaurants discussed above. Rental revenue decreased by $759, or 4.4%, due to lease terminations and expirations and a same-store sales decrease on franchise restaurants that pay rent calculated as a percent of revenue.

Franchised and licensed restaurants and other expenses increased $2,307, or 4.6%, to $51,969 during the twelve weeks ended November 3, 2008, as compared to the prior year period. This increase is mainly due to an increase in sales to franchisees and the relatively proportional increase in the cost of food, paper and supplies sold, as well as an increase in distribution costs related to higher fuel, labor and other costs.

Franchised and licensed restaurants and other expenses increased $10,902 or 6.5%, to $179,041 during the forty weeks ended November 3, 2008, as compared to the prior year period. This increase is mainly due to an increase in sales to franchisees and the relatively proportional increase in the cost of food, paper and supplies sold.

As of November 3, 2008, approximately 84.2% of Carl’s Jr. franchised and licensed restaurants purchase food, paper and other supplies from us.

22

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Hardee’s

	Twelve Weeks Ended						Forty Weeks Ended
	November 3, 2008			November 5, 2007			November 3, 2008			November 5, 2007
Company-operated restaurants revenue	$	115,171		$	137,395		$	397,967		$	485,419
Restaurant operating costs:
Food and packaging		35,438			42,638			120,383			146,866
Payroll and other employee benefits		34,365			42,746			121,904			150,919
Occupancy and other		27,796			30,459			89,486			105,299
Total restaurant operating costs		97,599			115,843			331,773			403,084
Franchised and licensed restaurants and other revenue:
Royalties		11,821			9,960			38,305			33,142
Distribution centers		5,874			6,919			18,817			18,213
Rent		3,303			1,931			9,793			5,895
Franchise fees		897			1,799			3,313			2,626
Total franchised and licensed restaurants and other revenue		21,895			20,609			70,228			59,876
Franchised and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)		1,559			1,517			5,591			4,663
Distribution centers		5,989			6,964			19,221			18,357
Rent and other occupancy		1,957			1,466			6,277			4,022
Total franchised and licensed restaurants and other expenses		9,505			9,947			31,089			27,042
Advertising		6,656			7,686			23,331			28,909
General and administrative		17,591			19,694			62,101			67,255
Facility action charges, net		914			235			3,507			(2,463	)
Operating income	$	4,801		$	4,599		$	16,394		$	21,468
Company-operated average unit volume (trailing-13 periods)	$	982		$	945
Franchise-operated average unit volume (trailing-13 periods)	$	971		$	969
Company-operated same-store sales increase		1.3	%		2.7	%		1.1	%		2.4	%
Franchise-operated same-store sales increase		2.5	%		0.4	%		0.8	%		0.5	%
Company-operated same-store transaction (decrease) increase		(3.5	)%		1.8	%		(3.2	)%		1.9	%
Average check (actual $)	$	5.09		$	4.87		$	5.14		$	4.93
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging		30.8	%		31.0	%		30.2	%		30.3	%
Payroll and other employee benefits		29.8	%		31.1	%		30.6	%		31.1	%
Occupancy and other		24.1	%		22.2	%		22.5	%		21.7	%
Total restaurant operating costs		84.7	%		84.3	%		83.4	%		83.0	%
Advertising as a percentage of company-operated restaurants revenue		5.8	%		5.6	%		5.9	%		6.0	%

23

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

The following table shows the change in our restaurant portfolio for the twelve and forty weeks ended November 3, 2008:

	Twelve Weeks Ended									Forty Weeks Ended
	Company- operated			Franchised and licensed			Total			Company- operated			Franchised and licensed			Total
Open at beginning of period		519			1,398			1,917			560			1,366			1,926
New		2			9			11			5			30			35
Closed		(8	)		(8	)		(16	)		(19	)		(30	)		(49	)
Divested		(23	)		—			(23	)		(88	)		(32	)		(120	)
Acquired		—			23			23			32			88			120
Open at November 3, 2008		490			1,422			1,912			490			1,422			1,912

Company-Operated Restaurants

Revenue from company-operated Hardee’s restaurants decreased $22,224, or 16.2%, to $115,171 during the twelve weeks ended November 3, 2008, as compared to the comparable prior year period. This decrease is mostly due to the net decrease of 94 company-operated restaurants since the end of the third quarter of fiscal 2008, which resulted from the divestiture of 118 company-operated restaurants to franchisees and the closure of 20 company-operated restaurants. This decrease was partially offset by a same-store sales increase of 1.3%, an increase in average unit volume and the additional revenues from seven new company-operated restaurants that opened during the same period and 37 restaurants that we acquired from two franchisees.

During the forty weeks ended November 3, 2008, revenue from company-operated restaurants decreased $87,452, or 18.0%, to $397,967 as compared to the forty weeks ended November 5, 2007. This decrease is primarily due to the net impact of the changes in our restaurant portfolio discussed above, partially offset by a same-store sales increase of 1.1%.

The changes in the restaurant operating costs as a percentage of company-operated restaurants revenue are explained as follows:

	Twelve Weeks			Forty Weeks
Restaurant operating costs as a percentage of company-operated restaurants revenue for the period ended November 5, 2007		84.3	%		83.0	%
Decrease in labor costs, excluding workers’ compensation		(1.2	)		(0.3	)
Increase in depreciation and amortization expense		0.9			0.6
Increase in utilities expense		0.6			0.3
Increase in asset disposal expense		0.6			0.3
Decrease in repairs and maintenance		(0.2	)		(0.4	)
Increase in rent expense		0.3			0.1
Decrease in food and packaging costs		(0.2	)		(0.1	)
Other, net		(0.4	)		(0.1	)
Restaurant operating costs as a percentage of company-operated restaurants revenue for the period ended November 3, 2008		84.7	%		83.4	%

Labor costs, excluding workers’ compensation expense, decreased as a percent of company-operated restaurants revenue during the twelve and forty weeks ended November 3, 2008, as compared to the prior year periods, due primarily to sales leverage and more efficient use of labor, partially offset by an increase in restaurant manager bonuses due to the performance of the restaurants against certain performance criteria.

Depreciation and amortization expense increased as a percent of company-operated restaurants revenue during the twelve and forty weeks ended November 3, 2008, from the comparable prior year periods, mainly due to increased restaurant remodel activity, asset additions from new restaurant openings and the impact of refranchising company-operated restaurants that had a higher proportion of fully depreciated assets.

24

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Utilities expense increased as a percent of company-operated restaurants revenue during the twelve and forty weeks ended November 3, 2008, from the comparable prior year periods, mainly due to natural gas and electricity rate increases.

Asset disposal expense increased as a percent of company-operated restaurants revenue during the twelve and forty weeks ended November 3, 2008, from the comparable prior year periods, mainly due to $413 of asset disposals related to two restaurant rebuilds during the current year periods and asset disposals resulting from our ongoing remodel program.

Repairs and maintenance expense decreased as a percent of company-operated restaurants revenue during the forty weeks ended November 3, 2008, as compared to the prior year period. During the forty weeks ended November 5, 2007, repairs and maintenance costs were unusually high due to the restaurants acquired in connection with the termination of a franchise agreement.

Rent expense increased as a percent of company-operated restaurants revenue during the twelve weeks ended November 3, 2008, from the comparable prior year period, due to the termination of a franchise agreement and our assumption of full operational control of those restaurants under operating leases. Some of these leases have unreasonable rent and if we are unable to negotiate acceptable lease terms for them, we may decide to close the restaurants.  There was no similar activity in the prior year period.

Franchised and Licensed Restaurants

Total franchised and licensed restaurants and other revenue increased $1,286, or 6.2%, to $21,895 during the twelve weeks ended November 3, 2008, as compared to the prior year period. This increase is mainly due to an increase in royalty revenues of $1,861, or 18.7%, which is primarily due to the increase in the number of franchised restaurants resulting from our refranchising program. In addition, there was a $1,372 increase in sublease rental revenue, primarily due to rent related to restaurants that were divested in our refranchising efforts and an increase of $656 in collections of previously unrecognized rent from financially troubled franchisees. These increases were partially offset by a decrease in distribution center revenues of $1,045, or 15.1%, due to decreased new store construction and remodel activity, and a decrease in franchise fees of $902, or 50.1%, related mainly to a reduction in restaurant divestitures as compared to the prior year period.

Total franchised and licensed restaurants and other revenue increased $10,352, or 17.3%, to $70,228 during the forty weeks ended November 3, 2008, as compared to the prior year period. This increase is mainly due to an increase in royalty revenues of $5,163, or 15.6%, which is primarily due to the increase in the number of franchised restaurants resulting from our refranchising program.  In addition, there was a $3,898 increase in sublease rental revenue, primarily due to rent related to restaurants that were divested in our refranchising efforts and an increase of $1,310 in collections of previously unrecognized rent from financially troubled franchisees over the prior year period. We also experienced an increase in distribution center revenues of $604, due to increased new store construction and remodel activity earlier in the year, and an increase of $687 in franchise fees primarily resulting from our refranchising efforts.

Franchised and licensed restaurants and other expenses decreased $442, or 4.4%, to $9,505, during the twelve weeks ended November 3, 2008, as compared to the prior year period. This decrease in costs is mainly due to a $975 decrease in distribution center costs (due to the related decrease in equipment sales) and an increase of $491 in rent expense related to an increase in the number of franchised restaurants that sublease property from us as a result of our refranchising program.

Franchised and licensed restaurants and other expenses increased $4,047, or 15.0%, to $31,089, during the forty weeks ended November 3, 2008, as compared to the prior year period. This increase in costs is mainly due to a $864 increase in distribution center costs (due to the related increase in equipment sales) and a $2,255 increase in rent expense related to an increase in the number of franchised restaurants that sublease property from us as a result of our refranchising program. We also had increased administrative costs of $928 as compared to the prior year period. This increase is mainly due to increased salaries and benefits expense due to the addition of new positions to support our refranchising efforts and various other expenses.

25

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Consolidated Expenses

General and Administrative Expense

General and administrative expenses decreased $1,480, or 4.5%, to $31,156, but remained a consistent 9.3% of total revenue, for the twelve weeks ended November 3, 2008, as compared to the twelve weeks ended November 5, 2007. This decrease was mainly due to a $715 decrease in training costs, primarily for operations, an $856 decrease in regional administrative costs, due to headcount reductions and other cost decreases resulting primarily from our refranchising program, and a $427 decrease in software depreciation. These decreases were partially offset by increased management bonuses of $663 based on our performance relative to executive management and operations bonus criteria.

General and administrative expenses decreased $2,241, or 2.0%, to $108,037, but increased 0.2% to 9.4% of total revenue, for the forty weeks ended November 3, 2008, as compared to the forty weeks ended November 5, 2007. This decrease was mainly due to a $2,937 decrease in training costs, primarily for operations, a $2,644 decrease in regional administrative costs, due to headcount reductions and other cost decreases resulting from our refranchising program, a $1,170 decrease in software depreciation, and a $438 decrease in aviation costs.  These decreases were partially offset by a $1,827 increase in share-based compensation expense, as a result of the issuance of additional stock options and restricted stock awards in fiscal 2008 that continue to vest in fiscal 2009 and increased management bonuses of $2,852 based on our performance relative to executive management and operations bonus criteria.

We currently expect to record approximately $2,800 of share-based compensation expense in the fourth quarter of fiscal 2009, which would be relatively consistent with the comparable prior year period. The actual charge will be dependent upon various factors, including our actual performance against the specified performance goals for fiscal 2009.

Interest Expense

During the twelve weeks ended November 3, 2008, interest expense increased $1,677, or 21.8%, to $9,363, as compared to the twelve weeks ended November 5, 2007. This increase is primarily due to an increase of $3,072 in the expense during the current period to adjust the carrying value of our interest rate swap agreements to fair value. This was partially offset by a $1,283 reduction in interest expense on our Facility, due to decreased average outstanding borrowings and lower interest rates during the current year period as compared to the prior year period.

During the forty weeks ended November 3, 2008, interest expense decreased $1,112, or 6.4%, to $16,330, as compared to the comparable prior year period. This decrease is primarily due to a decrease of $1,181 in the expense recognized during the current period to adjust the carrying value of our interest rate swap agreements to fair value. In addition, there was a decrease of $485 of interest expense due to the continued reduction of our capital lease obligations. These decreases were partially offset by a $417 increase in the interest on our Facility due to increased average outstanding borrowings earlier in the year which were primarily used for the prior year repurchases of our common stock and our capital expenditures for new restaurants and remodels. See Note 4 of Notes to Condensed Consolidated Financial Statements for additional detail of the components of interest expense.

Income Tax Expense

Our income tax expense during the forty weeks ended November 3, 2008 was reduced by $1,273 due to the impact of recent tax regulations. We expect our effective income tax rate for the remainder of fiscal 2009 to be approximately 41%. See Note 10 of Notes to Condensed Consolidated Financial Statements for additional detail of the components of income tax expense. See “Liquidity and Capital Resources” for a discussion of the expected impact of income taxes on our liquidity.

26

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Presentation of Non-GAAP Measurements

Adjusted EBITDA

Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to income from operations, an indicator of cash flow from operations or a measure of liquidity. As shown in the table below and defined in our Facility, Adjusted EBITDA is calculated as earnings before cumulative effect of accounting changes, interest expense, income taxes, depreciation and amortization, facility action charges, share-based compensation expense, impairment of goodwill and impairment of assets held for sale. Because not all companies calculate Adjusted EBITDA identically, this presentation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest expense, income taxes, debt service payments and cash costs arising from facility actions. Our maximum annual capital expenditures are limited by our Facility, based on a sliding scale driven by our Adjusted EBITDA.

	Twelve Weeks Ended				Forty Weeks Ended					Trailing-13 Periods Ended
	November 3, 2008		November 5, 2007		November 3, 2008		November 5, 2007			November 3, 2008
Net income	$	5,388	$	6,202	$	34,348	$	30,978		$	34,446
Interest expense		9,363		7,686		16,330		17,464			31,921
Income tax expense		3,773		4,888		21,882		25,692			22,802
Depreciation and amortization		14,835		14,769		48,141		49,679			62,564
Facility action charges, net		1,242		287		2,666		(2,218	)		3,602
Share-based compensation expense		2,658		2,850		9,524		7,755			13,147
Adjusted EBITDA	$	37,259	$	36,682	$	132,891	$	129,350		$	168,482

Liquidity and Capital Resources

Over the past several months, worldwide capital and credit markets have seen unprecedented volatility. We are closely monitoring the potential impact of these market conditions on our liquidity. To date, these market conditions have not had any material adverse impact on our liquidity or the availability of committed funds under our Facility. Based on information available to us, all of the financial institutions syndicated under our Facility are able to fulfill their commitments as of December 10, 2008.  However, there can be no assurance that one or more of them may not be able to fulfill their future funding obligations.

Notwithstanding the above, we expect that our cash on hand, coupled with future cash flows from operations and borrowings under our Facility will provide sufficient liquidity to allow us to service existing debt and to meet our operating and capital requirements for at least the next 12 months. We believe our most significant cash use during the next 12 months will be for capital expenditures. Based on our current capital spending projections, we expect capital expenditures to be between $120,000 and $130,000 for fiscal 2009 and between $100,000 to $110,000 for fiscal 2010. Under the terms of our Facility, we have no significant debt maturities coming due until April 1, 2012. See Note 4 of Notes to Condensed Consolidated Financial Statements for more information on our existing debt.

As a result of our income tax credit carryforwards and expected reversals of temporary differences, we expect that our fiscal 2009 obligation for federal, state and foreign income taxes will be approximately 17% of our income before income taxes in fiscal 2009. This rate results primarily from federal income taxes reduced by available alternative minimum tax and general business tax credits, as well as state and foreign income taxes. Our actual cash requirements for income taxes could vary significantly from our expectations for a number of reasons, including, but not limited to, unanticipated fluctuations in our deferred income tax assets and liabilities, unexpected gains from significant transactions, unexpected outcomes of income tax audits, and changes in tax law.

During fiscal 2008, we launched a refranchising program for our Hardee’s concept. During the twelve weeks ended November 3, 2008, we sold 23 company-operated Hardee’s restaurants and related real property with a net book value of $2,560 to one franchisee. In connection with this transaction, we received aggregate consideration of $4,075, including $605 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net loss of $1,070, which is included in facility action charges, net, in our Hardee’s segment.  During the forty weeks ended November 3, 2008, we sold 88 company-operated Hardee’s restaurants and related real property with a net book value of $12,682 to three franchisees. In connection with these transactions, we received aggregate consideration of $16,428, including $2,290 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net loss of $1,682, which is included in facility action charges, net, in our accompanying Condensed Consolidated Statement of Income for the forty weeks ended November 3, 2008, in our Hardee’s segment. As part of these transactions, the franchisees acquired the real property and/or subleasehold interest in the real property related to the restaurant locations.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

During the forty weeks ended November 3, 2008, we sold three company-operated Carl’s Jr. restaurants and related real property with a net book value of $1,068 to a former executive and new franchisee. In connection with this transaction, we received aggregate consideration of $2,173, including $100 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net gain of $983, which is included in facility action charges, net, in our accompanying Condensed Consolidated Statements of Income for the forty weeks ended November 3, 2008, in our Carl’s Jr. segment. As part of this transaction, the franchisee acquired the real property and/or subleasehold interest in the real property related to the restaurant locations.

During the forty weeks ended November 3, 2008, we terminated our franchise agreement and subleases with a Hardee’s franchisee as a result of its inability to remedy, on a timely basis, certain defaults under the terms of the agreements. As a result, we assumed full operational control of their 32 open restaurants, six of which were closed during the twelve weeks ended November 3, 2008. 12 of the affected restaurants are located on leased premises that we sublet to the franchisee. The remaining 14 are leased by the former franchisee from third parties and, although we are operating the restaurants, we have not assumed any of the lease rights or obligations for those properties. If we are unable to negotiate acceptable lease terms for any of the leased locations, we may decide to close the restaurants.

Our Facility provides for a $470,000 senior secured credit facility consisting of a $200,000 revolving credit facility and a $270,000 term loan. The revolving credit facility matures on March 27, 2012, and includes an $85,000 letter of credit sub-facility. During the twelve and forty weeks ended November 3, 2008, we made aggregate principal payments of $675 and $15,815, respectively, on the term loan. As of November 3, 2008, we had (i) borrowings outstanding under the term loan portion of our Facility of $252,410, (ii) borrowings outstanding under the revolving portion of our Facility of $65,000, (iii) outstanding letters of credit under the revolving portion of our Facility of $35,893, and (iv) availability under the revolving portion of our Facility of $99,107.

Our Facility permits us to make additional common stock repurchases and/or pay cash dividends of $58,434 as of November 3, 2008. In addition, the amount that we may spend to repurchase our common stock and/or pay dividends is increased each year by a portion of excess cash flow (as defined in our Facility) during the term of our Facility. Our Facility also permits us to make annual capital expenditures in the amount of $85,000, plus 80% of the amount of actual Adjusted EBITDA (as defined in our Facility) in excess of $150,000. In addition, we may reinvest proceeds from the sale of assets and carry forward certain unused capital expenditure amounts to the following year. As of November 3, 2008, we expect to be permitted to make total capital expenditures of $171,379 in fiscal 2009.

The terms of our Facility include financial performance covenants, which include a maximum leverage ratio, and certain restrictive covenants. Among other things, these covenants restrict our ability to incur debt, incur liens on our assets, make any significant change in our corporate structure or the nature of our business, prepay certain debt, engage in a change of control transaction without the member banks’ consents and make investments or acquisitions. Our Facility is collateralized by a lien on all of our personal property assets and liens on certain restaurant properties. We were in compliance with these covenants and all other requirements of our Facility as of November 3, 2008.

We have fixed rate swap agreements (which were amended effective September 10, 2008) with various counterparties to effectively fix future interest payments on $200,000 of our term loan debt at 6.12%.  These agreements will expire on March 12, 2012.  These derivative instruments were not designated as cash flow hedges under the terms of SFAS 133. Accordingly, the change in the fair value of the interest rate swap agreements is recognized in interest expense in our Condensed Consolidated Statements of Income.  During the twelve and forty weeks ended November 3, 2008, we paid $1,474 and $1,690, respectively, for net settlements under our fixed rate swap agreements.  As a matter of policy, we do not enter into derivative instruments unless there is an underlying exposure. These interest rate swap agreements are highly sensitive to interest rate fluctuations which could result in significant variability in their future value.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Effective August 11, 2008, the cumulative dividends declared since the most recent conversion rate adjustment resulted in a 1.0404% change in the conversion rate per $1 of the 2023 Convertible Notes, from the previous conversion rate of 116.6063 to an adjusted conversion rate of 117.8195.  As a result of the conversion rate adjustment, the previous conversion price of approximately $8.58 was adjusted to a conversion price of approximately $8.49.  On August 29, 2008, we notified the holders of the 2023 Convertible Notes that we would redeem all outstanding notes on October 1, 2008.  During the twelve weeks ended November 3, 2008, we redeemed and converted the remaining $15,167 of our 2023 Convertible Notes into 1,786,963 shares of our common stock. We also paid $303 for accrued interest and partial shares.  

The terms of our Facility are not dependent on any change in our credit rating. We believe the key Company-specific factors affecting our ability to maintain our existing debt financing relationships and to access such capital in the future are our present and expected levels of profitability and cash flows from operations, asset collateral bases and the level of our equity capital relative to our debt obligations. In addition, as noted above, our existing debt agreements include significant restrictions on future financings including, among others, limits on the amount of indebtedness we may incur or which may be secured by any of our assets.

During the forty weeks ended November 3, 2008, we declared cash dividends of $0.18 per share of common stock, for a total of $9,580. Dividends payable of $3,279 and $3,148 have been included in other current liabilities in our accompanying Condensed Consolidated Balance Sheets as of November 3, 2008 and January 31, 2008, respectively. The dividends declared during the twelve weeks ended November 3, 2008 were subsequently paid on November 24, 2008.

Subsequent to November 3, 2008, we declared cash dividends of $0.06 per share of common stock, payable to the stockholders of record as of January 26, 2009.

During the forty weeks ended November 3, 2008, cash provided by operating activities was $108,374, an increase of $2,093, or 2.0%, over the prior year comparable period. This increase is primarily attributable to an increase in net income of $3,370 and increases in deferred income tax of $5,368,  facility action charges, net, of $4,884, share-based compensation expense of $1,899, and provision for losses on accounts and notes receivable of $708. These increases were partially offset by a decrease in loss on sale of property and equipment and capital leases of $1,792, a decrease in depreciation and amortization of $1,538, and a decrease in the change in fair value of interest rate swap agreements of $1,181, as well as changes in operating assets and liabilities, including accounts receivable, accounts payable and other liability accounts. Working capital account balances can vary significantly from quarter to quarter, depending upon the timing of large customer receipts and payments to vendors, but they are not anticipated to be a significant source or use of cash over the long term. 

Cash used in investing activities during the forty weeks ended November 3, 2008 totaled $58,749, which principally consisted of purchases of property and equipment, partially offset by proceeds from the sale of property and equipment and collections on non-trade notes receivable.

Capital expenditures were as follows:

	Forty Weeks Ended
	November 3, 2008		November 5, 2007
Non-discretionary:
Remodels
Carl’s Jr.	$	8,760	$	22,882
Hardee’s		15,949		13,021
Capital Maintenance
Carl’s Jr.		8,896		8,423
Hardee’s		13,269		12,615
Corporate/other		3,942		5,726
Total non-discretionary		50,816		62,667
Discretionary:
New restaurants/rebuilds
Carl’s Jr.		15,246		14,634
Hardee’s		7,025		7,509
Dual-branding
Carl’s Jr.		969		1,077
Hardee’s		2,201		2,763
Real estate/franchise acquisitions		5,477		7,286
Corporate/other		924		2,233
Capital expenditures — discontinued operations		—		3,523
Total discretionary		31,842		39,025
Total	$	82,658	$	101,692

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share amounts)

Capital expenditures for the forty weeks ended November 3, 2008 decreased $19,034, or 18.7%, from the comparable prior year period mainly due to a $11,194 decrease in restaurant remodel activity, a $3,093 decrease in corporate and other asset additions and a $3,523 decrease in capital expenditures related to discontinued operations. Pursuant to our agreement to sell La Salsa, during fiscal 2008, Buyer reimbursed us for substantially all of the capital expenditures — discontinued operations.

Cash used in financing activities during the forty weeks ended November 3, 2008 was $48,194, which principally consisted of net repayments of $1,500 under the revolving portion of our Facility, payments of $15,815 under the term loan portion of our Facility, a change in cash overdraft of $13,911, repayments of $4,493 of capital lease obligations, repurchase of common stock of $4,296, and dividends of $9,449.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

(Dollars in thousands)

Interest Rate Risk

Our principal exposure to financial market risks relates to the impact that interest rate changes could have on our Facility. Our Facility, which is comprised of a revolving credit facility and a term loan, bears interest at an annual rate equal to the prime rate or LIBOR plus an applicable margin. As of November 3, 2008, we had $317,410 of borrowings and $35,893 of letters of credit outstanding under our Facility.  We have entered into fixed rate swap agreements with a combined notional amount of $200,000. These agreements will expire on March 12, 2012. The effect of the agreements is to limit the interest rate exposure on a portion of our term loan debt under our Facility to a fixed rate of 6.12%.  The interest rate swap agreements were not designated as cash flow hedges under the terms of SFAS 133. Accordingly, the change in the fair value of the interest rate swap agreements is recognized in interest expense in our Condensed Consolidated Statements of Income. These interest rate swap agreements are highly sensitive to interest rate fluctuations which could result in significant variability in their future fair values.

A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction in our annual pre-tax earnings of $1,174. The estimated reduction is based upon the outstanding balance of the borrowings under our Facility that are not covered by our interest rate swaps and the weighted-average interest rate for the fiscal year and assumes no change in the volume, index or composition of debt as in effect on November 3, 2008.

Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have not had a significant impact on us and are not expected to in the foreseeable future.

Commodity Price Risk

We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our accompanying Condensed Consolidated Balance Sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percent of company-operated restaurants revenue.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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In connection with the preparation of this Quarterly Report on Form 10-Q, as of November 3, 2008, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control

There have been no changes in our internal control over financial reporting during the fiscal quarter ended November 3, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

See Note 6 of Notes to Condensed Consolidated Financial Statements for information regarding legal proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(Dollars in thousands, except per share amounts)

Issuer Purchase of Equity Securities

The following table provides information as of November 3, 2008, with respect to shares of common stock repurchased by us during the fiscal quarter then ended (dollars in thousands, except per share amounts):

	(a)		(b)		(c)		(d)
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
August 12, 2008 — September 8, 2008		—	$	—		—	$	41,395
September 9, 2008 — October 6, 2008		—		—		—		41,395
October 7, 2008 — November 3, 2008 (1)		339,038		7.89		339,038		38,720
Total		339,038	$	7.89		339,038	$	38,720

____________

(1) We received and cancelled a total of 18,967 shares of our outstanding common stock in payment of taxes owed on ordinary income recognized by 16 of our employees in connection with the vesting of restricted stock awards issued under our stock incentive plans, which is included in the total number of shares purchased.

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Item 6. Exhibits

Exhibit #
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CKE RESTAURANTS, INC.
	(Registrant)
Date: December 10, 2008	/s/ Reese Stewart
	Reese Stewart
	Senior Vice President
	Chief Accounting Officer

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Exhibit Index

Exhibit #
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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