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Heard on the call: Sonic Corp.

Drive-in chain reports higher profit, improving sales

Sonic Corp. shares got a boost Wednesday after the 3,558-unit drive-in operator reported improving sales trends in the first quarter and outlined initiatives for the rest of the year.

Sonic's share price rose nearly 12 percent to $11.31 on Wednesday, a day after the Oklahoma City-based company released latest-quarter results that included a 16-percent jump in profit after a tax benefit helped offset a decline in revenue.

For the quarter ended Nov. 30, Sonic said net income rose to $7.2 million, or 12 cents per share, from $6.2 million, or 10 cents a share, in the year-ago period. The one-time tax benefit amounted to 2 cents per share. Revenue fell 5 percent to $129.1 million, from $136.5 million last year.

Same-store sales fell 2.4 percent in the quarter, compared with a drop of 6.4 percent in last year’s first quarter. Franchise same-store sales fell 2.5 percent, while corporate locations saw a dip of 1.9 percent.

In a research note Wednesday, securities analyst Steve West of Stifel Nicolaus pointed to Sonic's “slightly improved operations, less negative fundamentals and growing momentum from value investors willing to wait for the turnaround.”

“While we continue to believe the company's operating fundamentals will lag the industry due to volatile food costs, reduced media spending, less-than-compelling sales initiatives, and elevated unemployment in core markets,” West said, “we now believe the market optimism toward a turnaround is likely to continue to support shares.”

During a conference call with investors Tuesday, Sonic executives addressed areas where they were optimistic:

Margins. Cliff Hudson, Sonic’s chairman and chief executive, said he foresaw margin improvement into the range of 16 percent to 17 percent, but short of the historic highs of 20 percent. “It will be driven not just by increased sales but also by more effectively managing food packaging and labor costs,” he said.

Value messaging. “Our consumer’s perception of our value is very much defined by the experience that they have when they come to our restaurants divided by the price they pay,” Hudson said. Sonic introduced a value menu in 2009, he said, and in 2010, “we focused somewhat more on the numerator, a lot more heightened emphasis there with initiatives to improve customer experience such as skating car-hops and product quality initiatives, new product news that followed these quality initiatives and some new efforts at messaging.” Sonic introduced real ice cream last May, a quarter-pound foot-long chili-cheese Coney in July and bigger, loaded burgers in September.

“Real ice cream is really kind of helping us build and drive improvements in the afternoon and evening day parts while [the] Coney is helping particularly in the dinner day part,” Hudson said.

New ad agency. Sonic, which had been with Barkley Evergreen & Partners of Kansas City, Mo., for about 17 years, will be selecting a new ad agency, probably this month, Hudson said. Late last year it employed a new media-buying agency, Zenith.

Development. Scott McLain, president of Sonic, told analysts that franchisees had been more cautious about opening stores as a result of the company's declining sales and profit and continued economic uncertainty. He said franchisees opened nine units in the latest quarter and completed rebuilds or relocations on another three. Sonic projects a total of 40 to 50 new stores for the full fiscal year.

“As was the case last year, we are offering some development incentives not only for our more challenged markets but also targeted against markets that are close to achieving breakthrough media levels and for a few of our franchise developers that have the financial and operational capacity for accelerated growth,” McLain said.

Closures. Sonic closed 23 drive-ins in the first quarter, executives said. “Roughly half of these were in Florida and related to a larger restructuring effort of one of our franchisees, which when completed placed him in a much stronger overall financial position,” McLain said. “We also continue to actively evaluate our lower volume drive-ins and we do expect that additional closings will occur. However, at this point we expect the magnitude of those closings to be consistent with what we have seen over the last couple of years.”

Franchise royalties. Steve Vaughan, Sonic’s chief financial officer, said, franchising revenues fell about $1 billion in the first quarter.

“This decrease was primarily caused by the decline in franchisee same-store sales as well as the decline in franchise fee revenue related to fewer openings,” Vaughan said. “The effective royalty rate was relatively flat at 3.74 percent for the quarter with the decline in same-store sales largely off set by higher sales and rates at new drive-ins.”

Contact Ron Ruggless at [email protected].


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