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Sonic Corp. (SONC - Snapshot Report) reported earnings of 25 cents per share in the fourth quarter of fiscal 2012, surpassing the Zacks Consensus Estimate of 24 cents and year-ago earnings of 20 cents a share. For fiscal 2012, adjusted earnings per share were 60 cents a share compared with 53 cents.

Total revenue in the reported quarter dipped 0.2% year over year to $150.9 million, but was ahead of the Zacks Consensus Estimate of $149.0 million. Comparable store sales (comps) for the quarter grew 2.3%, mainly on a 2.1% uptick at franchise drive-ins and a 4.3% rise in company drive-ins. The systemwide comps growth turned around from the 0.5% increase recorded in the year-earlier period. In full-fiscal 2012, total revenue was down 0.4% year over year at $543.7 million.

Sonic registered a significant decline in its cost structure. Food and packaging expenses fell 30 basis points (bps) to 27.9%, as a percentage of revenue. Payroll and employee benefits and other operating expenses declined 130 bps and 60 bps to 34.6% and 21.0%, respectively.

While the fourth quarter generally experiences sequentially lower restaurant-level margins due to higher utility costs related to summer, drive-in level margins improved 220 basis points to 16.5% on the back of improved same-store sales growth and abating commodity inflation. Continued growth in margins calls for an improving fundamental in the company.

Store Update

Oklahoma-based Sonic opened 18 and closed 11 franchised drive-ins in the fourth quarter. Sonic also closed one company-owned drive-in. The drive-in fast food chain operator presently has 3,556 drive-in restaurants.
Management expects new franchise drive-in openings to be slightly higher in fiscal 2013 than fiscal 2012. However, Sonic anticipates the rate of growth to accelerate in 2014.

Liquidity

At the end of the quarter, cash and cash equivalents were $52.6 million, long-term debt due after one year was $466.6 million and shareholders’ equity was $59.2 million.

Outlook

For fiscal 2013, Sonic expects positive comps in the low single digits. Improvement in restaurant level margin will be a function of same store sales growth and is expected to expand 50-100 basis points. Selling, general and administrative expenses are expected in the range of $68–$69 million, and depreciation and amortization between $41 million to $42 million.

Sonic also expects to generate $45 million to $55 million in free cash flow in fiscal 2013.

Our Take

Sonic is gradually moving to a positive direction. The highlights of the fourth quarter earnings were the turnaround in comps and margin expansion based on stringent cost control measures. Efficient management of food costs and many pricing action augured well for the company. Better performance in company-owned comps as against franchised ones speaks off Sonic’s building of inherent strength.   

Sonic also tapped the important day part of sales, i.e., breakfast, to drive sales. Further, menu innovation and the layered day-part promotional strategy will likely place Sonic in a better position going forward.

Other initiatives that the company is taking are shutting down underperforming units, and focusing on smaller prototypes to improve return on investment and cost containment. Execution of a point-of-sale system over the next few years is also on Sonic’s  wish list. The program is scheduled to be spread across all the company-owned drive-ins within the end of calendar year 2013.

However, stiff competition in the marketplace and waning consumer confidence remain concerns for the company.

Sonic, which competes with the likes of BJ’s Restaurants Inc. (BJRI - Analyst Report), currently carries a Zacks #3 Rank that translates into a short-term ‘Hold’ rating. We maintain our long-term ‘Neutral’ recommendation on the stock.

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