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Sonic's (SONC) Shares Gain on Solid Q4 Preliminary Results

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Sonic Corp. announced the preliminary results for fourth-quarter fiscal 2018 that ended on Aug 31.

According to the company’s estimates, system-wide comps in the fiscal fourth quarter grew 2.6%, driven by 2.5% and 2.6% increase in company drive-ins, and franchise drive-ins, respectively. Further, adjusted earnings are estimated to be 51 to 52 cents for the quarter under review, which surpasses the Zacks Consensus Estimate of 50 cents and year-ago EPS of 45 cents.

Moreover, in fiscal 2018, management repurchased 5.2 million shares of common stock for $139.2 million, representing 12% of shares outstanding. It also made collective dividend payments of $24 million.

Following the news, the company’s shares have moved up 8.2% on Sep 11. Sonic’s sales-building efforts such as enhanced marketing and advertising, along with strong product lineup, have led its shares to gain 61.3% in the past year, outperforming the industry’s rally of 9.1%.


Increased Traffic a Major Growth Driver

Sonic witnessed its foot traffic to grow 2.5% in the fiscal fourth quarter compared with the year-ago quarter. The company has been heavily pursuing its target of positive comps growth by implementing strategies that would drive everyday value and thereby customer visits. Beside focusing on marketing and advertising to strengthen its brand name, Sonic has innovated menu offerings.

The company has extensively prioritized its digital capabilities. During the fiscal fourth quarter, Sonic rolled out mobile ordering facilities across its system and expects its traffic to grow further on such digital innovations.

Will Overall Top Line Gain in Q4?

Despite comps growth recorded in the fiscal fourth quarter, we find that Sonic has been plagued with dismal sales numbers in the fiscal third quarter. Intense competition from restaurant giants like McDonald’s (MCD - Free Report) , Domino’s (DPZ - Free Report) and YUM! Brands (YUM - Free Report) has been affecting Sonic’s sales. In the fiscal third quarter, total revenues declined 4.6% year over year.

Although the company’s traffic-building strategies are impressive, we expect sales pressure to have continued in the fiscal fourth quarter as well. The consensus estimate for sales in the quarter, therefore, is pegged at $113.1 million, suggesting an 8.5% decline from the prior-year quarter.

Fiscal 2019 Expectations

For fiscal 2019, the company expects traffic, comps and free cash flow to increase further. Meanwhile, management anticipates to return a cumulative $500 to $600 million in capital to shareholders from fiscal 2018 through 2021.

Sonic currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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