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Sonic Seeks To Reclaim Boom

Posted: Apr 02, 2009 11:25 AM by Ryan C. Fuhrmann

Tickers in this Article: YUM, JACK, WEN, MCD, SONC

Save for McDonald's (NYSE:MCD) and a select few other players, the fast food industry has proved itself to be far from recession-proof. Case in point: Oklahoma City-based Sonic (Nasdaq:SONC) is currently paying the price for overconfidence in its future and overall stale results at company-owned restaurants.

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Current Results
Sonic's second quarter sales dropped 3% to $169 million, as same store sales at company-owned "partner drive-ins" fell 6%. At quarter's end, 81% of the company's total store base was comprised of franchisee ownership, which experienced a more moderate 3% comparable sales decrease. The burger-maker is currently evaluating the underperformance of stores in which it holds a majority interest. Given that franchisees are out-managing the challenging sales environment better than parent Sonic, the company is looking to adjust the mix of franchised stores to 90%.

System-wide sales declined 3.6% and Sonic ended the quarter with 3,511 stores throughout the U.S. The addition of 27 new stores helped offset the same store sales decrease, but sales still dropped below analyst expectations, as did earnings, which
dropped to 14 cents per share from 15 cents reported during the same period last year. The earnings number includes a gain of 6 cents due to Sonic's repurchase of debt from an ill-timed transaction in 2006 in which it issued nearly $800 million in debt
for the repurchase of shares.

Outlook
Sonic plans to refranchise 90 partner locations, a move that will generate additional capital to pay down debt and hopefully improve performance. Management also has created value menus as it believes "consumers are really very focused on value today first and foremost." The company's management believes offering cheaper fare will help stem the current slide in sales, although it stopped short of providing sales or profit guidance for either the short- or long-term. (Explore the controversies that can surround companies' forward-looking statements in Can Earnings Guidance Accurately Predict The Future?)

Analysts currently project a 4.5% decrease in full-year sales to $768.8 million and earnings of 77 cents per share, which would represent a more than 20% decrease from last year. In other words, the near-term picture is quite cloudy, but Sonic reported positive sales results from the value menu it rolled out only a few months ago. The company's commitment to selling restaurants, reducing debt and invest in improving system-wide sales could help it regain its boom. Rivals Yum! Brands (NYSE:YUM) and Jack in the Box (Nasdaq:JACK) have become smooth operators in this area.

Bottom Line
On its website, Sonic boasts of "positive same store sales growth for 21 straight years and a five year average of 15% annual earnings growth." Current results are a far cry from this track record. In its defense, Sonic isn't alone.Consumers are eating out less these days, which has adversely affected many in the industry, including Wendy's (NYSE:WEN) Arby's chain. Longer-term, Sonic has plenty of expansion opportunities and should easily overcome current difficulties. (Learn more about investing in companies such as these in our related article Sinking Your Teeth Into Restaurant Stocks.)

By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

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