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Sonic Corp.’s (SONC - Snapshot Report) second quarter fiscal 2013 adjusted earnings of 5 cents per share increased 66.7% year over year and beat the Zacks Consensus Estimate by 25.0%. The year-over-year increase came mainly on the back of cost efficiency.

Total revenue in the reported quarter dipped 3.5% year over year to $111.1 million, which missed the Zacks Consensus Estimate of $113.0 million. Sluggish comparable store sales (comps) led to lower revenues in the quarter.

System-wide comparable store sales (comps) for the quarter were flat (versus 3.5% increase recorded last year), which comprised increases of 1.9% in company-owned outlets (versus 3.1% growth recorded last year) and 0.3% decline in comps at franchised drive-ins (versus 3.6% rise in the year-ago period). One less operating day than the prior year owing to the leap year hurt comps in the quarter.

This drive-in fast-food restaurant chain saw a significant decline in its cost structure, driving its profits higher. Food and packaging expenses fell 20 basis points (bps) to 28.1% as a percentage of revenues. Other operating expenses declined 130 bps to 22.5%.

Lower costs led to 140 basis points improvement in company-owned drive-in margins. Continued growth in margins reflects improving fundamentals of the company.

Store Update

Oklahoma-based Sonic opened 3 franchised and closed 22 franchised and 4 company-operated drive-ins in the second quarter. As many as 34 company operated drive ins were sold to franchisees in the quarter.

As of Feb 28, 2013, the drive-in fast food chain operator had 3,526 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.


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. Sonic also expects to generate $45 million to $50 million in free cash flow in fiscal 2013.

Our Take

Better performance of company-owned stores 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; multi-layered growth strategy, execution of a point-of-sale system and increased media spending.

However, there is still not much clarity as far as the company’s sales scenario is concerned. Stiff competition in the marketplace and waning consumer confidence remain concerns for the company.

Sonic currently retains a Zacks Rank #2 (Buy).  Some other restaurant industry stocks currently performing well include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Burger King Worldwide Inc. (BKW - Analyst Report) and Cracker Barrel Old Country Store Inc. (CBRL - Snapshot Report). While Red Robin carries a Zacks Rank #1 (Strong Buy), Burger King and Cracker Barrel hold a Zacks Rank #2 (Buy)

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