Sonic Corp.
(
SONC
) reported third quarter fiscal 2012 adjusted earnings of 24 cents
per share, surpassing the Zacks Consensus Estimate and year-ago
earnings by 2 and 3 cents respectively. On a GAAP basis, quarterly
earnings were 24 cents per share, compared with a loss of 8 cents
in the year-earlier quarter.
Total revenue in the reported quarter dipped 1.8% year over year
to $149.4 million, but was in line with the Zacks Consensus
Estimate. Comparable store sales (comps) for the quarter grew 2.8%,
mainly on a 2.7% uptick at franchise drive-ins and a 3.7% rise in
company drive-ins. The comps growth, however, deteriorated from the
3.9% increase recorded in the year-earlier period.
Sonic registered a modest decline in its cost structure. Food
and packaging expense fell 30 basis points (bps) to 27.8%, as a
percentage of revenue. Payroll and employee benefits and other
operating expenses declined 60 bps and 50 bps to 35% and 20.2%,
respectively. Restaurant level margins improved 140 basis points to
17.0% on the back of improved same-store sales growth and abating
commodity inflation.
Store Update
Oklahoma-based Sonic opened seven, acquired one from
company-owned unit and closed five franchised drive-ins in the
third quarter. Sonic also closed two company-owned drive-ins. The
drive-in fast food chain operator presently has 3,550 drive-in
restaurants and remains on track to open 30-40 new franchise
drive-ins in 2012.
Financial Position
At the end of the quarter, current assets were $41.6 million,
long-term debt due after one year was $470.6 million and
shareholders' equity was $48.9 million. Sonic completed its $30
million share buyback program in early June.
Outlook
For fourth quarter 2012, Sonic expects positive comps in the low
single digits. Improvement in restaurant level margin will be a
function of same store sales growth. Selling, general and
administrative expenses are expected in the range of $17-$18
million and depreciation and amortization between $10.5 million and
$11.0 million.
Sonic also expects to generate $50 million to $55 million in
free cash flow in 2012.
Our Take
Sonic is gradually moving in a positive direction. The takeaways
from the third quarter earnings were modest comps improvement and
margin expansion. Slightly benign food and packaging cost
environment will also bode well for the quarter ahead.
Sonic also tapped the important day part of sales, i.e.,
breakfast, to drive sales. Providing impetus on this day-part as
well as implementation of a 2% to 3% pricing in the beginning of
May will likely position Sonic's fourth quarter in a brighter
light.
Other initiatives that the company is taking are shutting down
underperforming units, 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
long-term wish list. The program will be launched this fall and
spread across all the company drive-ins within the end of calendar
year 2013.
However, stiff competition in the marketplace and waning
consumer confidence remain concerns for the company. Additionally,
fourth quarter generally sees sequentially lower restaurant-level
margins due to higher utility costs related to summer.
Sonic, which competes with the likes of
BJ's Restaurants Inc.
(
BJRI
), currently retains a Zacks #2 Rank, that translates into a
short-term 'Buy' rating. We also maintain our long-term Neutral
recommendation on the stock.
BJ'S RESTAURANT (BJRI): Free Stock Analysis
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SONIC CORP (SONC): Free Stock Analysis Report
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