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Sonic Reports In Line, Comps Up

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Oklahoma-based Sonic Corp. (NasdaqGS:SONC - News) reported first quarter 2012 earnings of 9 cents per share, in line with the Zacks Consensus Estimate, but below the year-ago quarter earnings of 12 cents per share.

Total revenue in the reported quarter inched down 0.7% year over year to $128.3 million. However, comparable store sales (comps) for the quarter inched up 0.1%, mainly due to a 0.2% uptick at franchise drive-ins, partially offset by a 0.1% drop in company drive-ins. The comps growth marked a turnaround from the 2.8% plunge recorded in the year-earlier period.

Food and packaging expense and other operating cost increased a respective 80 basis points (bps) and 70 bps to 28.6% and 23.7%, as percentage of revenue. Food and packaging expenses spiked mainly due to steeper beef and dairy costs. However, payroll and other employee benefits decreased 20 bps to 36.3% as a result of improved labor controls. Hence, restaurant-level margins fell 130 bps during the quarter.

Operating margin contracted 70 basis points to 13.1% in the first quarter of fiscal 2012, attributed to lower revenues, commodity pressures and higher technology expenses, partially offset by labor efficiencies at the store level and lower selling, general and administrative expenses. Selling, general and administrative expenses declined 5.3% to $15.4 million.

Store Update

Sonic opened 2 and closed 8 franchised drive-ins in the first quarter of 2012. The drive-in fast food chain operator presently has 3,555 drive-in restaurants and expects to open 30–40 new franchise drive-ins in 2012. New company-owned drive-ins are however not in the agenda as Sonic remains focused on performance rather than expansion.

Financial Position

At the end of the quarter, current assets were $82.6 million; long-term debt due after one year was $478.1 million and shareholders’ equity was $46.9 million. With a strong capital structure, Sonic expects to generate $35 million to $40 million in free cash flow for fiscal 2012.

During the quarter, Sonic repaid $3.8 million of its debt and repurchased $10.5 million of stock.


Sonic expects positive same-store sales for 2012. Restaurant-level margins are expected to be slightly adverse attributed to cost inflation, particularly in the first half of the fiscal year and investment in improving the quality of product, partially offset by labor efficiencies. Selling, general and administrative expenses are expected in the range of $68–$69 million and depreciation and amortization between $41 million and $42 million.

The company projects interest expense of roughly $32.0 million and capital spending in the $25–$30 million range.

Our Take

The company’s upcoming second quarter remains seasonally weak due to unpleasant weather conditions. Moreover, with food cost inflation and waning consumer spending due to uncertain economic environment, we expect estimates to go down in the coming days.

However, to drive traffic management continues to focus on service and product initiatives. Additionally, we expect the company to benefit from its franchising strategy as around 87% of total restaurants are currently franchised. We believe that franchising a large chunk of its system will provide another engine for EPS growth and ROE expansion, as the company will reduce its capital requirements. Alongside, free cash flow will continue to grow, allowing reinvestment for increasing brand recognition and enhancing shareholders’ return.

Sonic currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also maintain our long-term Neutral recommendation on the stock. One of Sonic’s prime competitors, BJ’s Restaurants Inc. (NasdaqGS:BJRI - News) reported third-quarter 2011 adjusted earnings of 24 cents per share, in line with the Zacks Consensus Estimate and higher than  the prior-year  earnings of 20 cents.

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