Sonic Misses on Bottom Line

Sonic Corp. (SONC - Snapshot Report) reported fourth quarter 2011 adjusted earnings of 20 cents per share, which lagged the Zacks Consensus Estimate by 2 cents but perked up from the year-ago quarter's earnings of 8 cents. The year-over-year improvement was driven by efficient cost management, strong comparable store sales (comps) at company-owned drive-ins.

In fiscal 2011, the earnings were 31 cents per share versus 34 cents in the year-earlier period.

Total revenue in the reported quarter was $151.2 million, down 2.5% year over year and in line with the Zacks Consensus Estimate. The drop in overall sales was also below the company’s previous guidance of positive low single digits even after assuming around 2% in price increases. Sonic’s overall comps declined 0.5% in the fourth quarter, mainly due to a 0.6% decline at franchise drive-ins, partially offset by a 0.4% uptick at company drive-ins.

For fiscal 2011, revenue declined 0.9% to $546.0 million mainly due to the refranchising of 22 company drive-ins over the last two fiscal years. However, comparable store sales (comps) growth for fiscal 2011 was 0.5%, reflecting a 1.8% increment at company drive-ins and 0.4% at franchise drive-ins. The growth was a turnaround from the decrease of 7.8% for the system recorded in the year-earlier period.

Food and packaging expense, payroll and other employee benefits increased a respective 60 basis points (bps) and 50 bps to 28.2% and 35.6% as percentage of revenue. Restaurant-level margins shrinked 90 bps to 14.5% during the quarter. Selling, general and administrative expenses inched down 0.6% to $16.2 million while depreciation and amortization expense dropped 2.8% to $10.4 million.

Store Update

During the fourth quarter, Sonic launched 17 drive-ins out of which 14 were franchised. Total openings were lesser than the year-ago period opening of 25 drive-ins. The drive-in fast food chain operator 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.

Financial Position

At the end of the quarter, current assets were $93.5 million; long-term debt due after one year was $481.8 million and shareholders’ equity was $51.8 million. With a strong capital structure conforming to favorable interest rate, Sonic expects to generate $35 million to $40 million of free cash flow in fiscal 2012.

Outlook

Oklahoma-based Sonic expects positive same-store sales for 2012. Restaurant-level margins are expected to be flat attributed to labor efficiencies, partially offset by cost inflation particularly in the first half of the fiscal year and investment in improving the quality of product. Selling, general and administrative expenses are expected in the range of $69–$70 million and depreciation and amortization between $41 million and $42 million.

The company projects interest expense of roughly $32.0 million and capital spending in the $25–$30 million range.

Our Take

Disappointing comps as well as sales performance 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 downturn came as a shock. Results at franchise drive-ins are also not up to the mark. To add to this, food and packaging expenses were pretty high mainly due to steeper beef and dairy costs.

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. Additionally, recently Sonic sanctioned a repurchase program of up to $30 million worth of common stock through August 31, 2012. Apart from bolstering shareholder value, this strategic move will also lift the relatively undervalued share price. Moreover, the step is also a perfect medium for the use of excess cash.

Sonic currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also maintain our long-term Neutral recommendation on the stock. One of Sonic’s prime competitors, Domino's Pizza Inc. (DPZ - Snapshot Report) reported third quarter 2011 earnings of 36 cents per share surpassing the year-ago level of 27 cents.

Read the full analyst report on DPZ

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