Sonic Corp. (SONC) reported second quarter 2012 adjusted earnings of 3 cents per share, surpassing the Zacks Consensus Estimate as well as year-ago earnings by a penny. However, on a GAAP basis, quarterly earnings were 3 cents, down from the year-ago earnings of 7 cents per share.
Total revenue in the reported quarter inched up 1.4% year over year to $115.1 million. The growth was buoyed by improved same-store sales partially offset by a decline from the refranchising of 31 stores during the quarter. However, comparable store sales (comps) for the quarter grew 3.5%, mainly due to a 3.6% uptick at franchise drive-ins and a 3.1% rise in company drive-ins. The comps growth marked an improvement from the 1.2% increase recorded in the year-earlier period.
Sonic registered a significant decline in its cost structure. Food and packaging expense fell 10 basis points (bps) to 28.3%, as a percentage of revenue. Both payroll and employee benefits and other operating expenses declined 30 bps to a 37.5% and 23.8%, respectively.
Store Update
Oklahoma-based Sonic opened 10 and closed 15 franchised drive-ins in the second quarter. Sonic’s franchise acquired 34 units from the company. The drive-in fast food chain operator presently has 3,550 drive-in restaurants and expects to open 30-40 new franchise drive-ins in 2012.
Financial Position
At the end of the quarter, current assets were $91.2 million, long-term debt due after one year was $474.3 million and shareholders’ equity was $48.9 million.
Outlook
Sonic expects positive same-store sales for 2012. Restaurant-level margins are expected to be flat to slightly favorable as cost inflation is cooling somewhat in the second half of the fiscal year. Selling, general and administrative expenses are expected in the range of $67-$68 million and depreciation and amortization between $42 million and $43 million.
The company projects interest expense of roughly $32.0 million and capital spending in the $25-$30 million range. Sonic also expects to generate $50 million to $55 million in free cash flow.
Our Take
Sonic is creeping ahead to the direction of positivity. The take away from the second quarter earnings were modest comps improvement and margin expansion. Management anticipates this favorable trend in margins to continue with moderating cost pressure in the latter half of the fiscal 2012.
To drive traffic, management continues to focus on marketing strategies. And last but not the least, in order to buck up sales, Sonic tapped the important day part of sales, i.e., breakfast. Providing impetus on this day-part will likely position Sonic’s third quarter in a brighter light as it will enjoy easy year-over-year comparison. Sonic began promoting its premium breakfast burrito line last August. Other initiatives that the company is taking on are shutting down underperforming units, focusing on smaller prototypes to improve return on investment and cost containment. However, stiff competition in the marketplace and waning consumer confidence remain concerns for the company.
Sonic, which competes with the likes of BJ’s Restaurants Inc. (BJRI), 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.
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