Sonic Franchise Stores Outperform Company Operations

Sonic slips on same-store sales outlook
Associated Press 09.24.08, 5:37 PM ET

NEW YORK -
Several analysts trimmed their fourth-quarter profit estimates for Sonic Corp. on Wednesday, after the drive-through restaurant chain said preliminary fourth-quarter same-store sales were "slightly negative."
Shares of Sonic fell 53 cents, or 3.3 percent, to $15.41.
After Tuesday's closing bell, Sonic said same-store sales were positive nationwide for the fiscal year ended Aug. 31, but partner drive-in sales declined for the fiscal year and in the fourth quarter. Same-store sales measure sales at stores open at least a year and are considered a good gauge of ongoing retail health.
In the fourth quarter, Sonic said same-store sales were positive at franchised drive-in locations, but same-store sales for partner drive-ins were "significantly negative," causing slightly negative same-store sales systemwide. Partner drive-ins are locations where the company owns a majority interest.
Oklahoma City-based Sonic is set to report fourth-quarter results Oct. 16, and analysts polled by Thomson Reuters expect 35 cents per share in earnings for the fourth quarter.
Stifel Nicolaus & Co. analyst Steve West trimmed his quarterly profit forecast by a penny to 34 cents, and expects Hurricane Ike and input costs to weigh on fiscal 2009 results. West said the impact from Hurricane Ike is much worse than previously expected because of massive power outages.
West, however, kept a "Buy" rating on the stock, expecting new products to drive sales and boost margins.
Meanwhile, KeyBanc Capital Markets analyst Lynne Collier, who rates the stock "Hold," also trimmed her fourth-quarter estimate and noted higher commodity costs and softening consumer spending. The company has significant exposure to rising beef and dairy costs, Collier said.
Collier also said a happy hour promotion increased customer traffic, but ended up hurting the average check.

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.