Sonic Comps Disappoint in 4Q

Sonic Corp. (SONC - Snapshot Report) recently reported comparable store sales (comps) growth for fiscal 2011, reflecting a 1.8% increment in drive-ins and 0.5% for the system. The growth was a turnaround from the decrease of 7.8% for the system recorded in the year-earlier period.

Sonic's fourth quarter same-store sales increased approximately 0.4% for company drive-ins and declined 0.5% for the system. The dip in quarter’s overall sales was also below the company’s original guidance of positive low single digits even after assuming around 2% of price increases. However, the company has been witnessing an upswing in comps since mid-August despite Hurricane Irene, thanks to the changes in the company’s promotional strategy.

Outlook

Oklahoma-based Sonic expects positive same-store sales in 2012, driven by sales-building initiatives and the introduction of products. Restaurant-level margins are expected to be flat attributed to labor efficiencies and sales growth, partially offset by cost inflation and investment in product enhancement. Selling, general and administrative expenses are expected in the range of $69–$70 million and depreciation and amortization is projected between $41 million and $42 million for fiscal 2012.

For 2012, the company projects interest expenses of roughly $32.0 million and income tax rate of approximately 37% to 38%. Capital spending is estimated in the $25–$30 million range.

Sonic presently has more than 3,500 drive-in restaurants and expects to open 30–40 new franchise drive-ins in 2012. New company-owned drive-ins are however not in the agenda as Sonic remains focused on performance rather than expansion.

Our Take

Disappointing comps in the fiscal fourth quarter left a sigh of discontent among investors. After clocking positive comps of 1.2% and 3.9% in the second and third quarters, the recent shortfall came as a shock. We believe, Sonic’s cost structure, will also suffer in the fourth quarter as it will lap a significant portion of its product quality investment. To add to this, food and packaging expenses were pretty high mainly due to steeper beef and dairy costs.   

Estimate Trend

Over the last 7 days, the estimates have been moving south with 9 out of 16 analysts slashing theirs for the upcoming quarter as well as fiscal year. The Zacks Consensus earnings estimates for the fourth quarter and fiscal 2011 are pegged at a respective 23 cents and 56 cents, representing a year-over-year decline of 2.17% and growth of 15.63%. The Zacks Consensus sales estimates for the fourth quarter and fiscal 2011 are $154.0 million and $549.0 million. The company is slated to release its fourth quarter earnings on October 25, 2011.

Sonic currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Morton's Restaurant Group Inc. (MRT) currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.

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