Sonic Fine-Tuning Its Strategy

By Ryan C. Fuhrmann | June 28, 2011 AAA

Fast food has been one of the slowest industries to recover from the credit-fueled recession. Case in point, drive-in burger chain Sonic (Nasdaq:SONC) has seen flat sales for more than five years now, though its trends are also being masked by the intent to sell off company-owned locations. Its third quarter results reflected this shift in strategy. Its plans are to focus on a more lucrative franchise model, which should send profits firmly upward over the long haul.
TUTORIAL: Top Stock-Picking Strategies

Third Quarter Recap
Total sales advanced 4.1% to $152.1 million. Sales at company-owned stores accounted for the majority of revenue at close to 75% and improved 4.6% on a 6.5% increase in comparable store sales. Sonic continues to sell off company-owned locations to franchisees and sold four stores during the quarter while closing two other restaurants. Franchised locations increased by two stores by netting out new stores, the four acquired from the parent company and store closures. The entire system of stores numbered 3,559 as of quarter end, with company-owned stores making up only 12.5% of the total.

Operating income jumped 17.5% to $29 million as the company did its best to offset higher food costs with modest SG&A expense growth. A drop in depreciation and asset charges also boosted profits, though they did not affect quarterly cash flow figures. Another hefty non-cash charge to retire debt and issue new debt sent reported net income into negative territory at $4.6 million, or a loss of 8 cents per diluted share. On an adjusted basis, Sonic estimated earnings at 21 cents per diluted share, or 40% ahead of last year's first quarter.

For the full year, analysts currently project negligible sales growth and total sales just north of $552 million. The consensus profit projection currently stands at 54 cents per share, or approximately 13%.

Sonic posted earnings of close to $1 per share back in 2008 and remains far from these profit levels. Reported sales will continue to shrink as the company pursues a franchise model and focuses on higher-margin royalty and related franchise commission revenue.

The net result should be higher profits over time at the parent company. Total system-wide store growth potential remains robust as Sonic still has plenty of real estate to expand into across the country. For comparison purposes, Wendy's/Arby's (NYSE:WEN) operates more than 6,500 stores, though some are outside of the United States. As of its most recent quarter end, privately-held Burger King operated more than 7,500 locations in the U.S. and Yum! Brands (NYSE:YUM), owner and franchisor of the Taco Bell, KFC and Pizza Hut brands, ran nearly 17,500 domestic locations.

Bottom Line
Sonic, along with Jack in the Box (Nasdaq:JACK) (2,200 restaurants) and Chipotle (NYSE:CMG) (nearly 1,100 locations), should be able to expand for many years to come. Sonic represents a value play as its operations have yet to see a full recovery from the latest recession. (For more, see Sinking Your Teeth Into Restaurant Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. This Stock Is Up 1,440%... And Could Still Double

    This Stock Is Up 1,440%... And Could Still Double

  2. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  3. Bear of the Day: Panera (PNRA) - Bear of the Day
    Stock Analysis

    Bear of the Day: Panera (PNRA) - Bear of the Day

  4. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

  5. Commodities: Has Their Time Come Again?
    Stock Analysis

    Commodities: Has Their Time Come Again?

Trading Center