Sonic, (NYSE:SONC) the fast food operator, just opened the first quarter of its fiscal year in unappetizing fashion. Industry conditions are likely to remain difficult until employment trends improve. An economic recovery will eventually boost Sonic's fortunes; the company has a number of ways to boost profitability going forward.
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Reported company sales fell 26% to $136.5 million, which reflected weak organic trends in the industry. Sonic has a target of having 86-88% of stores belonging to franchisees, up from around 80% currently.
This goal is beneficial for a number of reasons. First, it leads to more lucrative franchise royalties and fees and eliminates the costs that go with running and operating physical restaurant locations. Franchisees also have a better track record at running the stores, as evidenced by the fact that quarterly same store sales fell 9.1% at company-owned stores and a more modest 6.5% at the franchised ones.
New store growth helped stem the comparable store decline as Sonic opened 25 locations across its system (including both company-owned and franchised restaurants).
The top-line challenges fell straight to the bottom line as earnings decline to 10 cents per diluted share, down from 12 cents a year ago. Interest expense declined markedly but still ate up over 40% of operating income as Sonic took on a hefty debt load to repurchase stock at the height of the private equity buyout binge a couple of years ago. It is currently in the process of whittling down its indebtedness with excess free cash flow.
Sonic's struggles are not uncommon in the fast-food industry. Burger King (NYSE:BKC) reported a 5% sales decline and 6% drop in earnings in its most recent quarter and specifically cited unemployment that is hitting its core client demographic. Wendy's/Arby's (NYSE:WEN) reported sales declines in its Wendy's and Arby's chains and eked out a profit as it merges the two concepts under one corporate umbrella. Finally, Jack in the Box (Nasdaq:JACK) reported a top-line decline as it also sells off company-owned locations and experienced a 6% drop in valuation measures.
The Bottom Line
Sonic's first-quarter earnings fell below analyst expectations, as did its guidance. Management now expects full-year earnings to be flat year over year. Last year, the company reported 81 cents per diluted share. Analysts are currently projecting 68 cents, which includes a number of adjustments and puts the forward P/E ratio at approximately 10.6.
There is likely no hurry to invest as it will be some time before growth returns to sales and profits. Chipotle Mexican Grill (NYSE:CMG) looks like a better bet when it comes to consistent growth, but the shares currently trade at a much higher P/E ratio. (To learn about the restaurant stock sector analysis, read Sinking Your Teeth Into Restaurant Stocks.)
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