News
Sonic counts on new products, improvements to mitigate Q2 loss
March 24, 2010
Sonic Corp. is counting on new product debuts, product improvements and a new media strategy to improve sales, traffic and profitability in its current third fiscal quarter. In the second quarter ended Feb. 28, the company reported a net loss of $642,000, down 107 percent from its net profit of $8.7 million in the same quarter last year.
Systemwide same-store sales were down 13.2 percent for the quarter while same-store sales at partner drive-ins (those in which the company owns a majority interest) declined 14.9 percent. Comps were down 12.9 percent at franchise drive-ins.
Year to date, systemwide same-store sales were down 9.7 percent vs. a decrease of 3.6 percent in the prior-year period. The decline in systemwide same-store sales for the first half of fiscal 2010 reflected 9.3 percent lower same-store sales at franchise drive-ins and an 11.8 percent decline at partner drive-ins.
"The second fiscal quarter is typically the most volatile one for Sonic, and this year was no exception," said Clifford Hudson, Sonic chairman and CEO, in an earnings release. "As we announced earlier, our second quarter sales were adversely affected by severe winter weather. Many of our core markets registered much colder temperatures along with record snowfalls, which not only affected sales, but also the pace of new drive-in development."
A weather analytics consultant estimated that inclement weather accounted for about two-thirds of the decline in same-store sales for the quarter. Comps were also impacted by a pronounced decline in consumer spending in the company's core markets, particularly Oklahoma and Texas, which have recently started to experience economic challenges. The company used as evidence double-digit declines in sales tax collections in both of those states.
The company worked throughout 2009 to implement a number of initiatives that focus on pricing and improved customer service at the drive-in level to help improve negative same-store sales. Hudson said he expects those initiatives to pay off this fiscal year.
"With that foundation set, we have a number of initiatives in place and in development that should attract more consumers into the drive-in and, in turn, improve sales and earnings in the second half of the current fiscal year and over the longer term," he said.
The initiatives, many of which were announced earlier this month at Bank of America Merrill Lynch 2010 Consumer Conference in New York, include:
- Product quality improvements to several core menu items, including a new, richer ice cream product and a true footlong hot dog, with half-pound of beef vs. the former 2.68 ounces.
- New product news featuring innovative limited-time offers, such as the Ched-R-Pepper Burger, which is expected to launch in April.
- Refining its messaging and promotional strategy to highlight Sonic's key points of differentiation, high-quality, distinctive food, such as its Steak Melt Toaster and handmade onion rings, and skating carhops.
- Providing value in a unique way by offering a free medium order of handmade onion rings or tater tots with the purchase of a premium sandwich. The promotion will focus on the chain's differentiated menu.
- A new media strategy maximizing media impressions within the trade area of each individual Sonic Drive-In.
"In conjunction with our initiatives to improve customer service, which continues to show signs of promise and progress, these efforts are expected to have a positive impact on our sales trends in the third and fourth quarters of fiscal 2010," Hudson said. "Considering that approximately 70 percent of our earnings historically occur in the third and fourth quarters of the fiscal year, we are optimistic about both our short-term and long-term prospects."
Development
Systemwide drive-in openings totaled 17 in the second quarter (all franchise drive-ins), vs. 27 new drive-in openings during the second quarter of fiscal 2009, including 24 by franchisees. For the first six months of fiscal 2010, systemwide drive-in openings totaled 42, including 39 franchise drive-ins, versus 66 in the year-earlier period, including 58 franchise drive-ins.
The company expects that new franchise drive-in openings will total 80 to 90 for the full fiscal year. Scott McLain, Sonic president, said in the company's earnings call that the lower-than-expected number of openings has been impacted by declining sales and traffic. But as the company's sales and profits improve, so will the growth rate.
Income statement overview
Revenues for the second quarter were down 33 percent to $112.8 million, a decrease from $169 million in the year-earlier period. Sonic's lower second quarter revenues were attributable primarily to the impact on the company's revenue mix from refranchising 205 partner drive-ins during fiscal 2009. Sonic now receives franchise royalties from these refranchised drive-ins instead of partner drive-in sales; likewise, partner drive-in operating expenses have declined.
The company's revenues also reflected the impact of lower same-store sales on partner drive-in revenues and franchise royalties, as well as reduced franchisee fees related to fewer new drive-in openings vs. the year-earlier quarter. Offsetting these declines, to some extent, was increased other income related to income from refranchised drive-ins, in which Sonic retained a minority ownership interest and rental revenue from refranchised drive-ins.
Year to date, revenues were down 29 percent to $249.3 million, compared to $353.1 million last year.Year to date, net income also was down 64.5 percent at $5.6 million, compared to $15.8 million last year.
"With spring approaching and some signs indicating the economy is improving, we believe the long-term fundamentals of Sonic's business and its potential for growth are solid," Hudson said. "The sales-driving initiatives we have in place are expected to attract new consumers and improve the average check amount.Moreover, Sonic's franchising business model continues to generate strong operating cash flows."
An on-demand replay of Sonic's second quarter conference call is available at the company's Web site in the investor's section until April 23, 2010.
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