News
Sonic: May sales decline to hurt Q3 results
June 15, 2010
Sonic Corp. continues to be negatively impacted by the uncertain consumer environment and has updated its outlook for the third quarter ended May 31.
Same-store sales estimates for the system expected to decline between 6.0 percent and 6.5 percent for the quarter, the company reported. Though negative, same-store sales improved from March to April, but deteriorated in May.
The industry overall continues to be challenged by high unemployment and mixed signals from consumers. According to theUS Commerce Department the Consumer Confidence Index increased again in May, up 5.6 points to 63.3, compared to 57.7 in April. Despite the upswing, CreditNet reports that consumer confidence is down 1.1 percent.
Unemployment and underemployment continue to be a headwind for Sonic in the near term. Over the long term, management believes the strategic initiatives it outlined in March are right for the Sonic brand and will position the company well for improved sales performance over time.
"Our strategy is to drive sales with distinctive and innovative products and an elevated customer service experience," said Clifford Hudson, Sonic chairman and CEO. "Initiatives implemented in 2009 and most recently in 2010, — which include distinctive value promotions, new messaging emphasizing the brand experience, a new media allocation strategy and product quality improvements — are designed to improve sales by differentiating our brand from other quick-service restaurants."
Sonic's new value promotional strategy shifts its focus from typical value menu items to premium products priced affordably. In the third quarter, the chain's promotions included a free medium order of Tater Tots with the purchase of a premium sandwich.
"This promotion was successful in holding average check flat for the quarter, an improvement in trend," Hudson said.
Sonic also developed a targeted media allocation strategy and began the rollout of improved product quality for key menu items, including the launch of new real ice cream beginning May 17. In July, Sonic will introduce a 1/4-pound footlong chili-cheese Coney at a special price.
"We are very pleased with the quality improvements in both instances," Hudson said. "Combine real ice cream with a footlong chili-cheese Coney delivered by a smiling, skating Carhop, and the result will be an experience that is both memorable and unique for our customers. Despite the unpredictable nature of the consumer environment and its impact on sales, our focus will continue to be on the successful implementation and refinement of this strategy."
In regard to its capital management strategy, Sonic used a portion of its excess cash to purchase approximately $58 million of its class A-2 senior fixed-rate notes during the quarter.
"These purchases, combined with the $50 million in principal payments we will be making in fiscal 2010, will result in a decline of outstanding debt from almost $700 million to less than $600 million," Hudson said. "Further, with more than $60 million in remaining cash, we continue to look to use our cash opportunistically."
2010 Guidance
In light of sales performance in the third quarter, Sonic anticipates earnings per share for fiscal year 2010 will be in the range of $0.50 to $0.55, based on the following assumptions:
- Same-store sales decline of 4 percent to 8 percent for the fourth quarter
- New franchise drive-in openings of 80 to 85 for the year
- Unfavorable restaurant-level margins for the fourth quarter of approximately 150 to 250 basis points as a result of de-leveraging and higher than expected beef costs
- Depreciation and amortization of $42 to $43 million for the year
- A $6.5 to $7 million decline in interest expense reflecting lower debt levels for the year
- An income tax rate between 37.5% to 38.5% for the fourth quarter
- Capital expenditures for the year ranging from $25 to $30 million.
Sonic will present at two conferences in June, the William Blair & Co. 30th Annual Growth Stock Conference, in Chicago through Thursday, and the Oppenheimer & Co. 10th Annual Consumer, Gaming, Lodging & Leisure Conference in Boston June 29-30.
The William Blair investor presentation by Sonic's management team is scheduled at 4:20 p.m. Eastern time today and will be available to investors via a live audio webcast. A link to the webcast can be found at the investor section of the company's website,www.sonicdrivein.com, and the presentation will be available for replay through June 21 using the same link.
Sonic's Oppenheimer investor presentation by management is scheduled to begin at 3:20 p.m. Eastern time June 29 and will be available to investors via a live audio webcast. The presentation will be available for replay.
Sonic plans to report its third quarter results at the market close on June 21. The company will provide an online web simulcast of its earnings release via conference call that afternoon beginning at 5:00 p.m. Eastern time. An archived replay of the conference call will be available approximately two hours after the conclusion of the live broadcast and will continue through July 21.
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