Sonic Corp. (SONC), the drive-in fast food chain, reported second quarter fiscal 2011 adjusted earnings of 2 cents per share, which missed the Zacks Consensus Estimate by a penny. In the prior-year quarter, Sonic reported a loss of 1 cent per share. The improvement in results was aided by positive comparable store sales, driven by strategic initiatives and strengthening economy.
Total revenue in the reported quarter was $113.5 million, flat year over year, but was below the Zacks Consensus Estimate of $115 million. Sonic’s overall comps grew 1.2%, driven by higher same-store sales at franchised drive-ins and company-owned drive-ins, up 1% and 2.2%, respectively.
Sonic’s operating costs and expenses spiked 2.8% year over year to $78.0 million while selling, general and administrative expenses plunged 11.8% to $15.3 million. Same-store sales upside resulted in an 8.4% year-over-year expansion in operating income to $9.7 million.
Store Update
During the second quarter, Sonic launched 5 franchised drive-ins compared with 17 in the year-ago period, and expects to open 40 new franchised drive-ins in 2011. Sonic has no plans to open any company-owned drive-ins in 2011, as it remains focused on improvement rather than expansion.
Financial Position
During the quarter, Sonic bought back $62.5 million worth of senior notes in a privately negotiated transaction. The extinguishment of the notes benefited the company by approximately $5.2 million. The company concentrates on deleveraging its balance sheet and hence, reduced its long-term debt to $433.5 million from $529.9 million in the year-ago quarter.
At the end of the second quarter, the company had $30 million of unrestricted cash balance for general corporate uses and shareholder’s equity of $37.6 million.
Outlook
Oklahoma-based Sonic expects sequential improvement in same-store sales throughout fiscal 2011, driven by sales-building initiatives. Restaurant-level margins are expected to be slightly disappointing due to cost inflation and investment in improving the quality of product, partially offset by labor efficiencies and sales growth. Selling, general and administrative expenses are expected to range within $66–$67 million and depreciation and amortization between $41–$42 million.
The company projects interest expense to be roughly in the range of $33–$34 million and the income tax rate to be approximately 37% to 38%. Capital spending is likely to be in the $20–$25 million range.
Our Take
As the company is taking several initiatives to attract traffic and drive sales, we expect estimates to go up in the coming days. The current Zacks Consensus Estimate for 2011 and 2012 is pegged at 54 cents and 62 cents, respectively.
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, Brinker International Inc.(EAT) reported second quarter 2011 adjusted earnings per share of 38 cents, surpassing the Zacks Consensus Estimate of 32 cents. The upside in earnings was driven by continued margin expansion at Chili’s and top-line growth at Maggiano’s.
Sonic operates and franchises a chain of drive-in restaurants in the U.S. The company’s restaurants offer made-to-order hamburgers and other sandwiches and feature certain signature items, such as footlong coney cheese dogs, hand-battered onion rings, tater tots and specialty soft drinks. As of February 28, 2011, Sonic had a total of 3,555 drive-ins in operation, including 3,104 franchise-owned and 451 company-owned drive-ins.
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