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On Sep 12, restaurateur Sonic Corp. (SONC - Snapshot Report) pre-announced its same-store sales and earnings for the fourth quarter of fiscal 2013, which is scheduled to be reported on Oct 21, 2013. The company has also provided its fiscal 2014 outlook.

For the fourth quarter fiscal 2013, Sonic estimates comparable store sales (comps) growth of 5.9% compared with a 2.3% growth recorded in the year-ago period. The Summer of Shakes promotion and the limited time offer of pretzel dogs boosted comps in the quarter. Further, comps are estimated to increase 2.3% for fiscal 2013.

On the flip side, food costs related to the promotions were adversely affected by the product mix shift. Taking into account the improving comps and higher costs, the company expects adjusted earnings per share to be 30 cents in the fourth quarter compared with 25 cents recorded in the year-ago period.

Fiscal 2014 Outlook

Okla.-based Sonic expects positive same-store sales in low-single digit for fiscal 2014, driven by sales-building initiatives. Same-store sales growth will pick up in the latter half of the year with the implementation of a new point-of-sale system and digital point-of-purchase technology. The improvement will be more pronounced in the company-owned drive-ins.

Initiatives that will place the company in a better position amid a competitive setting include closure of underperforming units, focus on smaller prototypes to improve return on investment, a multi-layered growth strategy, execution of a point-of-sale system and increased media spending.

Drive-in-level margins are expected to improve 75 to 100 basis points backed by labor efficiencies and comps growth. Selling, general and administrative expenses are expected in the range of $69–$70 million and depreciation and amortization expenses are projected in the $42.5–$42 million range for fiscal 2014.

For 2014, the company projects interest expenses of roughly $25.0 million and income tax rate of approximately 37% to 37.5%. Capital spending is estimated in the $65–$70 million range. Free-cash flow is expected to range between $15 million and $25 million, a portion of which will be used to repurchase shares.

Sonic presently has more than 3,500 drive-in restaurants and expects to open 40–50 new franchise drive-ins in 2013. New company-owned drive-ins are however not on the agenda as Sonic remains focused on performance rather than expansion. There will be lesser number of shutdowns in 2013.
 
Our Take

Robust comps expectation for the fourth quarter encouraged investors. After clocking just 0.1% increase in the third quarter, the recent upside came as a pleasant surprise. Following the sturdy comps expectation, shares of Sonic surged 2.17% as of Sep 16, 2013. Additionally, expectations of higher company-owned comps in 2014 as against franchised ones indicate Sonic’s inherent strength. Overall, Sonic is gradually moving in a positive direction.

Estimates Trending Higher

Following the release of bullish data, estimates have been moving north with 6 out of 8 analysts raising their estimates for the upcoming quarter. The Zacks Consensus Estimate for the fourth quarter and fiscal 2013 are pegged at a respective 30 cents and 72 cents, representing year-over-year increases of 19.0% and 19.4%. The Zacks Consensus Estimate for fourth quarter and fiscal 2013 revenues are pegged at $156.0 million and $541.0 million, respectively.

Sonic currently retains a Zacks Rank #2 (Buy). Other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN - Analyst Report), Domino’s Pizza Inc. (DPZ - Analyst Report) and Burger King Worldwide Inc. , all with a Zacks Rank #2 (Buy).
 

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