Zacks_Analysts' Blog : Sonic Misses Estimate - Analyst Blog

Sonic Corp. (SONC) the drive-in fast food chain posted reported first-quarter fiscal 2011 results after the closing bell on Tuesday. The company reported earnings of 12 cents per share, surpassing the Zacks Consensus Estimate by 2 cents. Earnings included a tax benefit of 2 cents per share. In the prior-year quarter, Sonic had earned 10 cents per share.

Total revenue in the reported quarter slipped 5% to $129.1 million from $136.5 million in the year-ago quarter, due to drop in comparable same store sales. However, the company slightly outperformed the Zacks Consensus Estimate of $129 million.  Sonic’s overall same-store sales fell 2.4% with same-store sales decreasing 2.5% at franchise drive-ins and 1.9% at company-owned drive-ins.

Sonic’s operating costs and expenses decreased 4.0% year over year to $84.7 million, and selling, general and administrative expenses inched up 0.9% to $16.3 million. Lackluster revenues resulted in a 17.1% year-over-year reduction in operating income to $18.0 million, while operating margin fell 200 basis points to 14.0%. 

Store Update

During the first quarter, Sonic launched 9 franchised drive-ins, compared with 22 in the year-ago period, and expects to open 40 to 45 new franchise drive-ins in 2011. Sonic has no plan to open company-owned drive-ins in 2011, as it remains focused on improvement rather than expansion.

Financial Position

During the quarter, Sonic bought back $62.5 million worth of senior notes in a privately negotiated transaction. The extinguishment of the notes benefited the company by approximately $5 million. The company concentrates on deleveraging, thereby reducing long-term debt to $449.9 million from $529.9 million in the year-ago quarter.

At the end of the first quarter, the company had $30 million of unrestricted cash balance for general corporate uses and shareholder equity of $31.6 million.

Outlook

Oklahoma-based Sonic expects sequential improvement in same-store sales throughout fiscal 2011. Restaurant-level margins are expected to improve slightly due to labor efficiencies. Selling, general and administrative expenses are expected to range within $67–$68 million and depreciation and amortization within the $41–$42 million.

The company projects Interest expense to be roughly $33–$34 million and the income tax rate to be approximately 37% to 38%. Capital spending is likely to be in the $20–$25 million range.

Our Take

As the company is taking several initiatives to attract traffic and drive sales, we expect estimates to go up in the coming days. The Zacks Consensus Estimate for 2011 and 2012 is 54 cents and 60 cents, respectively.

Sonic currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain our long-term Neutral recommendation on the stock.

One of Sonic’s prime competitors, AFC Enterprises Inc. (AFCE) reported adjusted third quarter earnings of approximately 23 cents per share, which surpassed the Zacks Consensus Estimate of 18 cents,driven by positive same-store sales and 4 strategic plans, which focus on developing the brand, offering more value service to guests and introducing new products along with cost saving initiatives to improve margins and ramp-up new unit growth.

Sonic operates and franchises a chain of drive-in restaurants in the U.S. The company’s restaurants offer made-to-order hamburgers and other sandwiches and feature certain signature items, such as footlong coney cheese dogs, hand-battered onion rings, tater tots and specialty soft drinks. As of November 30, 2010, Sonic had a total of 3,558 drive-ins in operation, including 3,106 franchise-owned and 452 company-owned drive-ins.