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Sonic's Q4 Earnings In Line, Rev Beats

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Sonic Corp.’s fourth quarter fiscal 2013 adjusted earnings of 30 cents per share increased 20% year over year and were in line with the Zacks Consensus Estimate. The year-over-year increase came mainly on the back of higher revenues. Also, lower share count led to earnings per share growth.

Total revenue in the reported quarter grew 5.2% year over year to $158.8 million, which beat the Zacks Consensus Estimate of $156.0 million by 1.8%. Considerable upside in comparable store sales (comps) led to the revenue beat.

System-wide comparable store sales (comps) grew 5.9% in the quarter (versus 2.3% increase recorded last year), which comprised increases of 5.2% in company-owned outlets (versus 4.3% growth recorded last year) and 6.0% jump  in comps at franchised drive-ins (versus 2.1% rise in the year-ago period). The Summer of Shakes promotion and the limited time pretzel dogs offer boosted comps in the quarter.

This drive-in chain witnessed a slight decline in costs that helped its profits margin. Expenses for payroll and employee benefits fell 60 bps (basis points) to 34% as a percentage of revenues. Other operating expenses declined 40 bps to 20.6% as a percentage of revenues. However, this improvement was somewhat overshadowed by higher food and packaging cost. Food costs related to promotions were adversely affected by the product mix shift. Altogether, cost of company drive-ins sales declined 10 bps.

Fiscal 2013 Update

In fiscal 2013, adjusted earnings per share were 72 cents, up 20% year over year primarily on the back of cost efficiency. Total revenue dipped 0.2% year over year to $542.6 million due to lower franchise royalties and lease revenue. Improvement in comps was also sluggish at 2.3%, up 10 bps year over year.

Store Update

Oklahoma-based Sonic opened one company-operated and 16 franchised drive-ins in the fourth quarter. The company also closed 12 company-owned and 9 franchised units in the reported quarter.

As of Aug 31, 2013, the drive-in fast food chain operator had 3,522 drive-in restaurants.


Sonic expects positive same-store sales in low-single digit for fiscal 2014, driven by sales-building initiatives. Same-store sales growth will pick up in the second half of the year with the implementation of a new point-of-sale system and digital point-of-purchase technology. The improvement will be more pronounced in the company-owned drive-ins.

Initiatives that will place the company in a better position amid a competitive setting include closure of underperforming units, focus on smaller prototypes to improve return on investment, a multi-layered growth strategy, execution of a point-of-sale system and increased media spending. These initiatives are expected to drive fiscal 2014 earnings by 14% to 15% compared to fiscal 2013.

Drive-in-level margins are expected to improve 75 to 100 basis points backed by labor efficiencies and comps growth. Selling, general and administrative expenses are expected in the range of $69–$70 million and depreciation and amortization expenses are projected in the $42.5–$43 million range for fiscal 2014.

For 2014, the company projects interest expenses of roughly $25.0 million and income tax rate of approximately 37% to 37.5%. Capital spending is estimated in the $65–$70 million range. Free-cash flow is expected to range between $15 million and $25 million, a portion of which will be used to repurchase shares. The company is expected to buyback $40 million of stock.

Sonic expects to open 40–50 new franchise drive-ins in 2014. New company-owned drive-ins are however not on the agenda as Sonic remains focused on performance rather than expansion. There will be lesser number of shutdowns compared to 2013.

Our Take

Considerably better comps performance both at the company-owned as well as franchised levels indicates that Sonic is gradually moving in a positive direction. We expect the implementation of the new point-of-sale and point-of-purchase systems to provide further impetus to Sonic’s performance.

Sonic currently retains a Zacks Rank #2 (Buy). Others players in the same industry, which look attractive at current levels include AFC Enterprises Inc. , Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) and Bob Evans Farms, Inc. , all carrying a Zacks Rank #2.

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