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Sonic's sweet recipe for investors

For the most part, America's '50s-style drive-in diners are a long gone part of the past. At Sonic (SONC), they're very much part of the present. And, with 3,500 stores, this Oklahoma City-based burger and shake seller has a story Wall Street continues to support.

It hasn't always. From 2008 through 2011, Sonic's shares fell in three of the four years. But it's been straight up since, with a 55% gain in 2012, a 94% climb last year and another 35% advance in 2014, including an all-time high earlier this month. (I wrote about the stock in March and asked whether investors might be thinking the valuation was high after its two-year surge. Clearly, they weren't -- it traded around $23 then, and it's above $27 now.)

What's helping the company win, CEO Cliff Hudson says, is a diversified menu that isn't overly reliant on burgers. Beef costs have been elevated, and Sonic's menu, he believes, has offered it protection.

"One out of every seven hot dogs in this country, eaten out of the home, is eaten at Sonic," he says. Add to that the fact that about 40% of its sales are drinks and ice cream -- it also has tater tots -- and the stores are positioned fairly well on the commodity side. "This gives us a real natural hedge vs. someone who's just in the hamburger business," he says.

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As for the customer side of it, a key there has been a new appreciation for chicken, a protein U.S. residents have been favoring for years over beef. Chief Marketing Officer Todd Smith said in a separate interview that the company had considerable ground to make up with regard to poultry, and it's trying to do so now.

"At Sonic we had never really focused on chicken prior to the last couple of years," Smith says. "So when you look at where we were two and a half years ago relative to our competitors, we felt like chicken was actually a deficit for us. We weren't doing it as well as could, nor were we really appealing to customers in a way that they were eating."

All-day menu

In markets where Sonic stores aren't heavily represented, it still might garner name recognition because of the long-running series of humorous ads with the "Two Guys." For those who've missed them, the guys sit in a car at Sonic with their shakes and franks and ponder various odd aspects of life.

Hudson notes that while Sonic is in 44 states, it gets about 75% of its system revenue in around a dozen of those. The Southwest is a large part of sales, with ample stores found in Texas and Oklahoma, the latter state being where it began. What's now Sonic started in 1953 as Top Hat Drive-In in Shawnee, Okla.

The entire menu is available all day. Whereas it's major Internet news when Burger King or McDonald's (MCD) makes an alteration to one of their daytime segments, Sonic has long been fine with selling any meal whenever.

"We feel strongly that a customer should be able to get what they want," Smith says. "So if they come in, and they want a breakfast burrito at lunch, we feel like they should get that. And we've always felt that way, which is why we've always done it."

Of late, a new positive for those patrons has been the decline in gas prices, a development that's seen as giving a boost to many restaurants, and retail in general, moving into 2015.

"You think about the average consumer, if gasoline is $4 a gallon vs. ($2.50) a gallon, it's huge," Hudson says. "It does leave, for our average costumer at least, pretty nice cash in their pocket, and we are seeing a benefit from a traffic standpoint."

Another new development is Sonic's product test kitchen in Oklahoma City, where it's working on recipes as well as equipment and processing practices. Of note is the open approach. Unlike other companies that might be inclined to keep their laboratories far out of sight, Sonic actually has a part of its kitchen viewable from the street. Smith says the company likes knowing that curious members of the public can stop and watch the goings-on, and he says if Sonic is getting the menu right, it doesn't matter anyway that competitors can see the research taking place.

"Ours is actually a concept that is built on a differentiated experience first," Smith says of Sonic's drive-ins. "You have your own menu board, you can take your time, [and] you don't feel like you're rushed because there's no one behind you. If you want to go quickly, we can certainly deliver a quick experience. If you want to be more leisurely, you can."

And when the food's ready, you'll have it delivered by a carhop. You don't see a lot of those these days. But at Sonic, you do.

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