Home > Stock Analysis

Sonic Serves Up A Perfect Q2

Posted: Mar 26, 2008 15:11 PM by Glenn Curtis

Tickers in this Article: SBUX, MCD, SONC, BKC

You can't help but be impressed with upstart burger chain Sonic (Nasdaq:SONC). The company just keeps growing despite the tremendous competition from big-name, deep-pocketed chains including Burger King (NYSE:BKC) and McDonald's (NYSE:MCD).

Get Free Stock Analysis By Email

Sonic's also grown at a time when average consumers are keeping a close eye on their spending. Perhaps people just love its drive-in 1950s style. Whatever the reason for its surge, based upon Sonic's second-quarter results, the company and the stock should continue to perform in 2008.

Comps Are Cooking!
In its second quarter ended February 29, Sonic earned $9.3 million (15 cents per share) which is well north of the roughly $6.2 million (9 cents per share) it earned in the comparable quarter last year. In addition, its revenue line came in at $174.6 million, which is a bit more than an 8% jump from the $161.5 million it reported last year. The numbers were essentially in line with analyst's expectations, which called for the company to earn 15 cents per share on about $177.5 million in revenue.

But it wasn't the top or bottom line that caught my attention; it was Sonic's same store sales, which were up 3.2% in the period. This represents a nice jump from the 2.1% comp store improvement it posted in Q1, and is likely to draw analyst attention, which, in turn, should drive the stock.

The same store sales increase is all the more impressive because the company reported a 2% increase in the second quarter last year. This wasn't growth from an artificially low base. Finally, Sonic's operating margins came in at about 15.3%, which is a roughly 50-basis point increase over the 14.8% it posted last year. This indicates that the improved sales weren't just the result of Sonic cutting prices on its burgers and slushes. (For more on the important of same store sales, check out Analyzing Retail Stocks.)

Belly Up To The Bar, It's Happy Hour
In the earnings release management also made a quick comment that unfortunately seemed to get buried: "Going forward, we expect the positive impact of Happy Hour, combined with the launch of our new line of coffee products this month, will further set Sonic apart as the Ultimate Drink Stop."

First off you are probably wondering what's "Happy Hour?" Is Sonic now selling booze with it's burgers? Not quite, drinks for Sonic's Happy are offered at half price between 2-4pm everyday, but there's no alcohol, just soft drinks and slushes. This may seem to contradict the lack of sale prices and discounts I mentioned earlier, but what it does do is bring in hoards of people who also spend lots of money on the company's more expensive fare. Remember that overall margins increased.

Sonic is also in the middle of rolling out a new line of premium coffees, mostly dressed up espressos and lattes. These two initiatives are very important. Most successful fast food chains draw foot traffic through new menu introductions, and this also puts Sonic in the hunt to take advantage of the lucrative coffee market - perhaps eventually competing with the likes of Dunkin Donuts, Starbucks (Nasdaq:SBUX) and McDonald's.

All in all, with some estimates placing specialty coffee sales accounting for almost 8% of the $18 billion U.S. coffee market, this could be a very profitable venture.

Bottom Line
Sonic's top and bottom line numbers grabbed the headlines, but it's the burger chain's same-store-sales increase that was truly impressive. This shows Sonic is a growing presence in the fast food market, and its plan to expand to high-end coffee will only drive sales further. In short, I think the stock will continue to move higher in 2008. My target price is $30.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS