Sonic’s Revenue Hit by Refranchising Efforts

System same-store sales fell 2%, compared with a 5.3% increase in the year-earlier period

s1Sonic Corp. (NASDAQ: SONC), the largest drive-in restaurant chain in the US, announced its financial results for Q1 FY17 on January 04th, 2017.

Headquartered in Oklahoma City, Oklahoma, the Company operates and franchises a chain of quick-service drive-in restaurants in the US.

As of August 31st, 2015, the Company operated 3,526 Sonic Drive-Ins in 44 states, which included 387 company drive-ins and 3,139 franchise drive-ins. The restaurant chain serves more than three million customers every day and nearly 90% of its 3,500 drive-in locations are owned and operated by local businessmen. Read more about Sonic’s financial results below.

Q1 FY17 financial highlights

During Q1 FY17, Sonic’s revenue, which includes franchise royalties and fees, fell 11% to $129.6 million from $145.8 million in the year-ago same period. Company drive-in sales plunged 15% to just $87 million versus $103 million in Q1 FY16, while franchise royalties and fees came in at $40.1 million versus $39.9 million last year.

System same-store sales fell 2%, compared with a 5.3% increase in the year-earlier period, but in-line with the previous quarter’s decline. System same-store sales decline of 2% consisted of a 2% same-store sales decrease at franchise drive-ins and a 2.4% decrease at company drive-ins during the reporting quarter.

On the brighter side, total costs and expenses fell 14% to $102 million in Q1 FY17 versus $119 million last year. The bulk of the expenditures were payroll and benefits, coming in at 31.7 million, as well as food and packaging costs, which amounted to $24.1 million. However, drive-in margins declined by 150 basis points during the reporting quarter.

Sonic opened 14 net new franchise drive-ins during Q1 FY17 and refranchised 56 drive-ins. For the past several years, franchised drive-ins have comprised almost 90% of Sonic’s chain, with the remaining being company-owned drive-ins. Looking ahead, Sonic is looking to increase its total franchised base toward approximately 95% of the system by the end of FY17. As part of these efforts, Sonic is refranchising company-owned drive-ins aimed at improving its capital efficiency and optimizing performance of the refranchised drive-ins. These efforts are on the same lines as McDonald’s Corp. (NYSE: MCD), the world’s largest fast food provider, which is also undertaking a massive refranchising effort, under which only 10% of McDonald’s stores will be company-owned by 2018.

s2In the burger segment, Sonic is facing intense competition with more nimbler brands like Shake Shack Inc. (NYSE: SHAK), Chik-fil-A Inc., and Whataburger that offer a more appetizing menu. Moreover, its competitors such as Wendy’s, Chipotle Mexican Grill Inc. (NYSE: CMG) and Five Guys Burgers and Fries have been fast expanding their operations. As a result, the Company spruced up its product pipeline by introducing premium products like Frozen Lemonades and Limeades and Bacon Lovers Chili Cheese Coneys. Sonic is also building on its premium menu with the new Fiery Ultimate Chicken Sandwich and Fiery Cheeseburger. In beverages, Sonic has added Frozen Teas and under the treat category, introduced Sweet & Salty Master Blasts and Creamery Shakes.

Overall, Sonic’s Q1 FY17 net profit rose 5% to $13.1 million, or $0.28 per diluted share, compared to net income of $12.5 million, or $0.24 per diluted share, in the same period of the prior year. Excluding refranchising costs and other items, diluted EPS was unchanged at $0.24 a share versus the year-ago comparable period.

c22Other highlights

Share repurchase: During Q1 FY17, Sonic repurchased 2 million shares, representing 4% of the total shares outstanding.

Guidance for FY17

For FY17, Sonic expects system same-store sales to range between negative 2% to 0%. It also expects royalty revenue growth from new unit development, with 65 to 75 new franchise drive-in openings. The Company also forecasts drive-in-level margins of 16% to 17%, depending on the timing of drive-in divestitures and the degree of same-store sales growth at company drive-ins.

Sonic also forecasts selling, general and administrative expenses of approximately $84.0 million reflecting increased investment in human resources and technology to support brand initiatives as well as depreciation and amortization expenses of $37.5 million to $38.5 million, reflecting the divestiture of company drive-ins as previously announced. The Company also forecasts capital expenditures of $40 million to $45 million for ongoing investment into its technology initiatives and free cash flow of approximately $60 million. It also plans to use the remaining $122 million share repurchase authorization across the fiscal year, inclusive of refranchising proceeds and an expected quarterly cash dividend of $0.14 per share.

Stock Performance

s4Sonic’s stock stood at $27.55, up 5.15%, at the close on Thursday, January 05th, 2016, having reached an intraday high of $27.86 and a low of $25.53 during the session. The stock’s trading volume was at 2,626,907 for the day. The Company’s market cap was at $1.32 billion as of Thursday’s close.

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