Sonic Stuck In Neutral

By Ryan C. Fuhrmann | January 06, 2012 AAA

Drive-in restaurant chain Sonic (Nasdaq:SONC) reported a slight uptick in its sales trends during the first quarter of its fiscal year, but it still has a long way to go before convincing investors that food improvements and new food offerings will revive half a decade of flat sales.
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First Quarter Recap
Sales fell 0.7% to $128.3 million as comparable store sales at company-owned locations fell 0.1% and the system-wide (includes company-owned and franchised locations) store count fell by six locations to 3,555 restaurants as of quarter end. This slightly lowered lucrative royalty and franchise fee revenue. Sonic has been selling company-owned locations to franchisees and ended the quarter with 446 locations, though it didn't sell off any during the first quarter. Comps at franchised locations advanced a modest 0.2%.

Operating income fell 5.8% to $16.8 million as higher food costs ate into gross margins. Management did control most other expenses, lowering payroll as well as SG&A expenses. A jump in income tax expense served to dent the bottom line further as net income dropped 24.1% to $5.5 million. It reported 9 cents in earnings per diluted share, which was down a penny from the 10 cents management estimated it earned last year, which excludes the benefits of a favorable tax settlement.

In stark contrast to rivals such as McDonald's (NYSE:MCD) and Chipotle Mexican Grill (NYSE:CMG), Sonic has yet to see sales recover from the depths of the credit crisis. Management was encouraged by the slight uptick in comps but also detailed "patches of sales volatility consistent with prior quarters." When pressed on specific volatility during questions from the earnings conference call, management chose to tout food quality improvements and the successful introduction of breakfast food. (To know more about income statements, read Understanding The Income Statement.)

Analysts currently anticipate modest full-year sales growth of 1% and total sales of $551.4 million. They project earnings of 55 cents, which would be up from 53 cents reported last year. Management detailed estimated free cash flow production of between $35 million and $40 million, down considerably from the roughly $63 million generated last year.

The Bottom Line
Overall, investors are being left hungry, waiting to see a sustainable sales and profit turnaround. As it stands, sales have fallen more than 4% annually over the last five years, while profits are down close to 19% annually. Additionally, management chose to take on significant debt during the credit crisis and buy back stock. This was likely a move to fend off any advances from private equity groups during the past boom, but has left a hefty debt load of $478.1 million.

The forward price to free cash flow multiple is quite reasonable at about 10, but for a number of years now Sonic has been a value trap for shareholders. Optimists are holding out hope that the sales uptick will gain momentum, but for now most rivals, including those above as well as Wendy's (Nasdaq:WEN), which is seeing popularity of new product offerings, look to be outperforming Sonic. Even Jack in the Box (Nasdaq:JACK), whose namesake stores are seeing flat trends, has Qdoba to rely on for growth. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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