Sonic Corp. (SONC 32.84, -2.79, -7.84%) is trading sharply lower after
reporting Q3 (May) results last night. It refers to itself as “America's
Drive-In” and it serves approximately 3 mln customers every day. About 95% of
SONIC's nearly 3,600 drive-in locations are owned and operated by franchisees. Sonic’s Drive-Ins offer a variety of food items including burgers,
hot dogs, ice cream, and breakfast.
In MayQ results, non-GAAP EPS rose 21% year/year to $0.52, which was better than market expectations. Revenue fell 4.6% year/year to $118.3 mln, which was shy of market expectations. Your first thought may be that is a low sales number for such a large burger chain with 3,600 locations. However, 95% of locations are run by franchisees, which means that from an accounting standpoint Sonic records only the royalty and fees, not the full dollar value of the food/drinks. While revenue is much lower, their margins are much higher than non-franchisee businesses.
System same-store sales declined -0.2%, consisting of a -0.2% same-store sales decrease at franchise drive-ins and a +0.2% increase at company drive-ins. This was a sequential improvement from FebQ's result of system same-store sales comp of -2.9%, consisting of a -2.8% decrease at franchise drive-ins and a -3.7% decrease at company drive-ins. Sonic says its MayQ comps “reflect a material improvement in trend, driven by ongoing initiatives to increase marketing reach.” Sonic has also refreshed its advertising creative and it introduced new products, including the Sonic Signature Slinger and Pretzel Twist.
The chain “continued to support a simplified everyday value message via the Carhop Classic promotion in April and May, which featured a Quarter-Pound Double Cheeseburger or Signature Slinger and Tots for $2.99. These value options offer compelling price points and are key to driving traffic and increase sales.” On the product front, Sonic is “now promoting new Chicken Tenders as part of a $3.99 Crispy Tender Dinner, as well as Snow Cone Slushes featuring innovative flavors such as Pickle Juice and Tiger's Blood. Sonic also continues to roll out mobile order ahead technology across the system following a successful operational test.”
Sonic has been aggressive in terms of buying back stock. During MayQ, it repurchased 1.5 mln shares, bringing the total to 4.3 mln shares repurchased for the first nine months of FY18, or 9.8% of shares outstanding.
While there is only one quarter left in the fiscal year, Sonic narrowed its non-GAAP EPS guidance to $1.45-1.49 from prior guidance of $1.43-1.50. Same-store sales for the system in FY18 should be down 1% to flat. Sonic also expects to open 50 to 55 new franchise drive-in locations this fiscal year.
In sum, the quarter was pretty decent with EPS upside and sequential comp improvement. However, the stock had already ramped higher in early June when Sonic guided to flat comps in MayQ, reaffirmed guidance and authorized a $500 mln share repurchase plan. So, the strong MayQ result was pretty much expected. The weakness appears to be due to profit taking and perhaps investors wanted to see a more bullish outlook for Q4 (Aug). Hopefully, management is just being conservative in not raising full year guidance.
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