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Sonic Corp.’s (SONC - Snapshot Report) first quarter fiscal 2013 earnings of 11 cents per share increased 22.0% year over year and was in line with the Zacks Consensus Estimate. The year-over-year increase came mainly on the back of cost efficiency.

Total revenue in the reported quarter dipped 1.8% year over year to $126.0 million, which was also in line with the Zacks Consensus Estimate. The re-franchising of 34 company drive-ins during the second quarter of 2012 resulted in a 3.4% decline in company drive-in sales during the reported quarter.

Comparable store sales (comps) for the quarter grew 3.0% backed by increases of 4.2% in company-owned outlets and 2.9% in franchised outlets. System- wide comps growth caught up momentum as it substantially improved from just 0.1% increase recorded in the year-earlier period. The layered day-part promotional strategy and efficient messaging helped drive comps growth.

This drive-in fast-food restaurant chain saw a significant decline in its cost structure, driving its profits higher. Food and packaging expenses fell 10 basis points (bps) to 28.5%, as a percentage of revenue. Payroll and employee benefits and other operating expenses declined 50 bps and 20 bps to 35.8% and 23.5%, respectively.

Higher comps coupled with lower costs led to 80 basis points improvement in company-owned drive-in margins. Continued growth in margins calls for improving fundamentals of the company.

Store Update

Oklahoma-based Sonic opened one and closed eight franchised drive-ins in the first quarter. There was no change in the count of company-owned drive-ins. The drive-in fast food chain operator presently has 3,549 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 $42.7 million and long-term debt due after one year was $462.9 million. At the end of August 2012, company had cash and cash equivalents were $52.6 million and long-term debt was $466.6 million.

Share Repurchase

The company bought back $18 million of stock representing 3% of its outstanding stock in the first quarter. In December, the company repurchased additional $6 million of stock leaving approximately $14.9 million available for repurchase under the existing $40 million share repurchase program.

Outlook

For fiscal 2013, Sonic expects positive comps in the low single digits. Improvement in restaurant level margin will depend on 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. Sonic also expects to generate $45 million to $55 million in free cash flow in fiscal 2013.

Our Take

The highlights of first quarter earnings were strong comps momentum and margin expansion based on stringent cost control measures. Better performance of company-owned comps as against franchised ones speaks of Sonic’s efforts to develop inherent strength.

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

Execution of a point-of-sale system over the next few years is also in the scheme of things. The program is likely to be spread across all the company-owned drive-ins by 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 (Hold). We maintain our long-term ‘Neutral’ recommendation on the stock.

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