Sonic

The more I hear from Sonic (SONC), the drive-in restaurant chain, the more I believe that this is a broken company. SONC reported disappointing results on Tuesday as the company earned 28 cents for its third quarter ended May. Analysts expected SONC to earn 31 cents which was flat with the third quarter of 2007.
The company claimed that the shortfall was due to colder and wetter weather. Same store sales declined 0.4% in the quarter but there was a wide disparity between a 0.5% increase at franchised units versus a 3.9% decline at “partner” drive-ins, which are primarily company owned. To the company’s credit, sales did pick up as the quarter progressed.
SONC has several problems. Weather is certainly one of those problems but it goes much further than just some rain in March. SONC has hoped to expand coast to coast and from border to border. However, so many of those geographies don’t have the year round weather to compliment the drive-in business model.
The commodity cost pressures is certainly hurting SONC. The company gets the double whammy of higher food costs which impacts its costs and the higher cost of gasoline which puts fewer drivers on the road to dine at the company’s drive-ins.
SONC has made one big mistake in the past year, which is to take on a huge amount of debt to restructure its capital structure and buy back stock. Since 2q06 (February 28, 2006) SONC share count has declined from about 89 million shares (reflecting a 3 for 2 split in May 2006) to nearly 62 million shares and is down about 5 million shares in the last year. The stock has lost about 1/3 of its value in the last two years and now SONC has gone from being nearly debt free to carrying about $700 million in debt.
When you put this all together, I don’t have much confidence in SONC's business model or management proficiency.