Sonic???s Comp Growth Continues

Drive-in fast food chain operator Sonic Corp. (SONC - Snapshot Report) recently reported system-wide comparable store sales (comps) growth of 2.8% for the third quarter of 2012, mainly based on a 2.7% rise in franchise drive-ins and 3.7% jump in company drive-ins. However, this was lower than the year-ago increase of 3.9%.

On a two-year basis, same-store sales for the system increased 6.7% in the third quarter of 2012.

Sonic's second quarter comps grew 3.5%, mainly due to a 3.6% uptick at franchise drive-ins and a 3.1% rise in company drive-ins. The comps growth marked an improvement from the year-ago increase of 1.2%.

Outlook

Oklahoma-based Sonic expects positive same-store sales in 2012, driven by marketing initiatives and the addition of new menu items. Restaurant-level margins are expected to be flat to slightly favorable as cost inflation is somewhat under control in the second half of the fiscal year. Selling, general and administrative expenses are expected in the range of $67–$68 million and depreciation and amortization between $42 million and $43 million.

For 2012, the company projects interest expenses of roughly $32.0 million and capital spending in the $25–$30 million range. Sonic also expects to generate $50 million to $55 million in free cash flow.

Sonic presently operates 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

The company’s continuous success of achieving comps growth in all the three quarters of 2012 is encouraging and reflects that the company’s efforts are paying off. Management continues to focus on promotional strategies, service and product initiatives to drive traffic. Other initiatives undertaken by the company include shutting down underperforming units, focusing on smaller prototypes to improve return on investment and cost containment

Estimate Trend

The comps results were encouraging as over the last 7 days, 6 out of 13 analysts raised the estimates for the third quarter of 2012. However, none of the analysts moved in the opposite direction. For fiscal 2012 and 2013, 5 and 6 analysts, respectively, moved their estimates upward, with none made downward revisions.

In the last 7 days, the Zacks Consensus earnings estimate for the third quarter and fiscal 2012 inched up by a penny to 22 cents and 56 cents, respectively. The company is slated to release its third quarter earnings on June 27, 2012.

Sonic currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Jamba, Inc. (JMBA - Snapshot Report) currently retains a Zacks #1 Rank, which translates into a short-term Buy rating.