Cold weather may have dampened Sonic Corp.’s third-quarter same-store sales, but officials for the Oklahoma City-based drive-in chain said Sonic’s performance would heat up the rest of the year as new culinary, marketing and technology initiatives take hold.
Chief executive Clifford Hudson noted during the company’s third-quarter earnings call that harsher winter weather compared with last year’s third quarter negatively affected same-store sales between 3 percent and 4 percent, particularly in March. But as the weather warmed up in April and especially May, Sonic’s same-store sales accelerated.
"Looking into May was particularly noteworthy because May 2012 was our highest comp month of fiscal 2012," Hudson said. "To have our business move positively in such a positive comp manner in the strongest month of the quarter made us feel very good about the underlying results and the strength of our business and our strategies."
For the May 31-ended third period, Sonic’s net income increased 2.8 percent to $14.8 million, or 26 cents per share, compared with $14.4 million, or 24 cents per share, a year earlier.
Third-quarter revenue declined 1.9 percent to $146.6 million, reflecting a systemwide same-store sales gain of 0.1 percent and a reduction in lease income. Same-store sales increased 0.2 percent at franchised locations during the quarter, offset by a 1.1-percent decrease at company-owned drive-ins.
Company bullish on sales drivers
Hudson noted that Sonic expects to improve same-store sales further in 2013 — which in the long run ideally would pave the way for a virtuous circle of increased marketing spending, new-unit development and free cash flow — through national media initiatives, new products and the adoption of a new point-of-sale system.
Part of the sequential same-store sales improvement from March to May was the increased national ad spending in those months, which drove awareness, he said.
“If there’s greater opportunity for sales — people are out moving around in May versus March versus January — then we’re allocating dollars to help drive the business during those months,” Hudson said. “In a core market … when we get increased advertising, brand loyalty in promotional events really helps. In developing markets, it seems to help quite a bit fairly quickly.”
In calendar 2013, Sonic’s total ad spending would not increase significantly compared with 2012, Hudson said, but the allocation of those dollars would shift markedly toward national TV, at 67 percent of the budget, compared with 48 percent in 2012. Local TV and non-TV advertising each gave about 10 percent of their share of marketing dollars from 2012 to 2013, going from 35 percent of spending in 2012 to 26 percent for local TV, and from 17 percent to 7 percent for non-TV expenditures.
Sonic is not planning to ask for greater contributions to the national marketing fund from franchisees, Hudson added, though the total marketing budget is expected to increase due to higher same-store sales.
The new marketing program is driving not only sales of advertised products like half-price shakes after 8 p.m. and the Premium Asiago Chicken Caesar Club, but also franchisee confidence in opening new units, Hudson said. The greater brand awareness from national marketing is working well with more favorable unit economics from a smaller restaurant prototype, he said.
“So quite suddenly, not just the return on investment looks better than it looked two or three years ago, but the risk of opening a Sonic anywhere in the United States has now shifted because of that national marketing,” Hudson said. “We are beginning to get many more inquiries on a regular basis from potential operators looking at opening Sonic Drive-Ins, whether in our core markets, developed markets or new markets.”
New and existing units would implement a new point-of-sale system by the first half of fiscal 2014, chief financial officer Stephen Vaughan added.
“We will begin to get some benefit of that in the second half of [fiscal 2014], which is our seasonally stronger time of the year,” he said. “Fiscal 2015 will likely be the year that we see significant benefit from the POS. That is probably going to be our single biggest driver of margin improvement.”
Unit growth to accelerate in 2014
The company lowered its guidance for franchised-restaurant openings to between 25 and 30 units in fiscal 2013, from “slightly more than fiscal 2012,” in which franchisees built 36 new locations.
Sonic officials would not point to bad weather, the resulting flat same-store sales of the third quarter, or the lending environment as the biggest factor behind the decelerating unit-growth projection. However, some locations that the brand had hoped to open this summer and that incurred delays would open in the first quarter of fiscal 2014.
The company remains confident that it can resume faster unit growth next year, having solidified the smaller prototype’s lower build-out costs and gained efficiencies from the move toward national marketing, Hudson said.
“The way we are looking at this versus 12 or 18 months ago, proving out that smaller building has caused us to … look at core markets differently than new markets in terms of how we would go about development and where we will open,” he said. “In the near term, you see more impact from smaller towns and core markets, and then by the time late 2014 runs into 2015, you’ll start seeing the developing new markets play a greater role.”
Sonic Corp. operates or franchises more than 3,500 restaurants in the United States.