Earnings Lowdown: Sonic
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Sonic Corp. (NASDAQ: SONC), the drive-in restaurant chain boasting over 3,500 locations in 43 states, reported its third quarter last Wednesday. Shares were up $0.16 to $9.50 in after-hours trading that day and closed out Thursday up 2.89% to $9.61. What did the company report to get that raise?
Earnings: Nuts & Bolts
Total revenue was down nearly 2%, year-over-year, from $152.1 million to $149.4 million. The dip was largely due to 35 locations switching from company ownership to franchised, meaning that Sonic no longer gets sales from those locations but makes up for that in royalties and fees. Approximately 88% of Sonic locations are franchises.
Established locations performed well on the operational metrics front, same store sales were up across the board. Overall comparable store sales were up 2.8% versus 3.9% last year. That includes a 3.7% increase in the company owned drive-ins and a 2.7% increase at the franchise locations.
Net income was $14.4 million, a vast improvement over the $4.7 million net loss from last year. The EPS works out to $0.24 (diluted) or $0.21 (diluted), excluding extinguished debt. Analysts estimated an EPS of $0.22, making this the third consecutive quarter that Sonic has exceeded this particular expectation.
The fourth quarter forecast includes $50 to $55 million in FCF and a goal of maintaining low single digit comparable store sales, which will in turn bolster restaurant margins. Plans for the quarter include the opening of 15 to 20 new franchises. The company expects $17 to $18 million in selling and general expenses and around $11 million in depreciation and amortization.
It’s Not Just Good. It’s Sonic Good
Sonic competes in the populated and varied Restaurant industry, though its drive-in dining experience makes it stand in a class of its own. Sonic’s menu includes burgers, fries, and other fast food fare that would make it a competitor of McDonald’s (NYSE: MCD) but it also includes a full dairy dessert menu that puts it up against Dairy Queen, a wholly-owned subsidiary of Berkshire Hathaway.
Sonic will never stand toe-to-toe with McDonald’s in numbers or span but the underdog has wisely adopted popular parts of its competitors menu over recent years. That includes expanded breakfast offerings and coffee treats on par with the popular McCafé blended drinks.
Dairy Queen, while it does serve food, is more of an ice cream place that happens to include savory options. Sonic has the reverse, as the majority of its menu is not ice cream. It does include a version of the Blizzard, one of Dairy Queen’s most popular treats.
The real standout for Sonic is its atmosphere. That’s where being majorly franchised works for the company. Franchise owners are going to make sure the customer experience is as authentically Sonic as possible in order to drive sales. The exterior of a Sonic restaurant is as recognizable to its fans as the golden arches of its rival. Though the menu is varied and adaptable, many customers go to Sonic simply for the novelty of being able to eat at a drive-in, a once popular American dining ritual that’s now considered quite retro.
Should You Drive-In or Drive Off?
The fourth quarter report will include the pivotal summer months. If temperatures are moderate to mild across the country, Sonic locations could see a bump up in customers. If there are record heat waves, customers might prefer a location that includes indoor seating, such as McDonald’s or Dairy Queen. The franchise agreements will help cushion Sonic a bit against this type of risk.
Sonic is currently trading near the upper middle of its 52-week range of $6.35 to $11.34. During the week of the earnings report, RBC Capital changed its price target from $10 to $12 while Barclays went from $8 to $9. The median price target is $11.
If you’re looking at Sonic for the short term, the general consensus is to buy. Longer term investors may want to wait for a pullback to below $9. Sonic is ultimately a company that favors slow, almost snail-like growth strategies. It’s a worthy investment consideration for the patient.
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