Sonic strategizes on pricing, unit growth

Sonic strategizes on pricing, unit growth

A Heard on the Call report following fourth-quarter earnings

Sonic Corp. executives told analysts Tuesday they are becoming more nimble at driving traffic and promoting items at the 3,500-unit drive-in chain, such as switching this past summer to a hot dog promotion from a burger push.

In the fourth quarter ended Aug. 31, Sonic reported net income of $12.3 million, or 20 cents per share, up from $4.7 million, or 8 cents per share, in third quarter of 2010. Sonic said it took an impairment charge of $15 million related mostly to the fair value of company-owned drive-ins during the period.

Revenue fell to $151.2 million from $155.1 million in the same quarter last year [3].

During Tuesday’s call, executives of the Oklahoma City, Okla.-based quick-service chain discussed strategy going forward.

Sonic chairman and chief executive J. Clifford Hudson said the chain has expanded its market to five dayparts — breakfast, lunch, afternoon, dinner and evening — over the past several years.

“It's been a challenge for us with this change in the economy to use the resources we have — dollars for advertising, menu items, new product news — to be able to move business across these multiple day parts,” Hudson told analysts.

Sonic had a bit of a misstep in promoting burgers in the third and fourth quarters, Hudson said.

“If you do look at this summer, when we moved to hamburger promotion early summer, May into June, we found that was not working in the manner that we had hoped and expected,” he said.

However, the company was able to switch gears to promote its line of hot dogs [4].

“We believe that the company's advertising transition from hot dogs to burgers negatively impacted sales early in the quarter, as the burger promotion was not as well received,” analyst Lynne Collier of Sterne Agee said in a note Wednesday.

“However, the company said [same-store sales] have rebounded and turned modestly positive since mid-August as the company's advertising has shifted back to hot dogs and more traditional food-focused TV ads.”

In the fourth quarter, same-store sales fell about 0.5 percent, with company-owned same-store sales up 0.4 percent and franchised units down 0.6 percent.

Additional highlights from Tuesday’s call:

Pricing: Sonic increased prices in April and June.

“The franchisees have been a little more aggressive than the company on pricing,” said Sonic chief financial officer Stephen Vaughn. “They're probably running closer to 2.5 percent, to maybe even 3 percent.”

A new menu rollout in November likely will affect prices minimally, he added.

Commodity costs: Despite higher-than-anticipated commodity costs in fiscal 2011, Vaughn said Sonic saw flat overall restaurant margins.

“Beef and ice cream were the primary cost drivers in the fourth quarter,” Vaughn said. “A lot of the inflation will continue to pressure margins, particularly in the first half of the fiscal year. In the first quarter, we are projecting unfavorable costs of 75 to 100 basis points net of pricing.”

Franchising: Sonic president W. Scott McLain said the franchise business remains solid, with the company seeing franchise royalties rise $1.7 million for the year.

“We did see a slight decline in our average royalty rate, as a result of some of the development incentives we've offered over the past two years, as well as our efforts to assist some of our more challenged markets,” McLain said.

Franchisees opened 14 new drive-ins during the quarter, and 40 new drive-ins for the year.

McLain said drive-in unit-level profits were up about $5,600 in the fiscal year.

Sonic Corp. closed 12 units during the fourth quarter and 47 during the year, bringing the total fiscal year-end unit count to 3,561 drive-ins in 43 states.

In guidance, the company said Sonic plans to open 30 to 40 new franchised drive-ins in fiscal 2012.

Contact Ron Ruggless at [email protected] [5].
Follow him on Twitter: @RonRuggless [6]