Digesting the Quarter
Sonic rang in the first quarter of its fiscal year with a resounding thud as sales fell 3% to $184.1 million, which consisted of overall negative same-store sales growth of 3.6% on a 1.7% decline in foot traffic and a 1.9% decline in average check size.
The drop in comparable sales was more severe at partner, or company-owned locations, which saw a decline of 6.6%, while franchised locations registered a decline of 2.9%. During the earnings conference call, an analyst suggested that the difference was due to more aggressive pricing that didn’t pan out at partner locations. Meanwhile, management referred to the overall need to bring customers back to Sonic. Currently, consumers have opted to buy groceries from the likes of Kroger (NYSE:KR) and SUPERVALU (NYSE:SVU) to save money by eating at home. (Get a taste for how to analyze this sector at Sinking Your Teeth into Restaurant Stocks.)
The introduction of the value menu is designed to improve traffic trends. But the success or failure of this strategy has yet to be determined, as Sonic only rolled out the new menu options on December 29, 2008. The company hopes that increased foot traffic as a result of the value menu will stave off the significant decline in profitability, as first quarter earnings fell by nearly half - to $0.12 per share on lower sales. Higher advertising spending related to the roll out of the value menu and hefty interest expense on an ill-timed decision to take on debt and buy back shares in an attempt to fend off a hostile takeover at the height of the private equity boom in 2006 also contributed to Sonic’s decline in profits.
Battening Down the Burger
Until macro conditions improve, Sonic has a few levers it can pull. Lowering prices on certain menu items should help on the fringes and the company has plans to opportunistically increase them in other categories. In addition, Sonic is also looking to sell company-owned stores in order to shift the mix of partnered stores to between 12% and 14% of total stores, down from 17-18%, currently. Such measures will leave room for Sonic to pay down debt. And fundamentally, Sonic is “primarily a franchiser” of its restaurants, which leads to a high margin fee and royalty revenue.
Last year, Sonic reported 97 cents in full-year earnings per share, and the average analyst projection for the coming year is a similar 96 cents. That puts the forward P/E at just under 12, which falls well below fast food rivals such as McDonald’s (NYSE:MCD), Burger King (NYSE:BKC) and Wendy’s/Arby’s Group (NYSE:WEN). This multiple appears quite reasonable, provided that consumers start spending again, because it would allow the company to reignite its store expansion plans and return to bottom line growth. (EPS helps investors analyze earnings in relation to changes in new-share capital. To learn more, read Getting the Real Earnings.)