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Sonic Q2 comps impacted by weather, reduced consumer spending
March 10, 2010
The severe winter weather throughout the Central and Eastern United States has hurt already struggling quick-service brands. Earlier this week, Burger King announced that its January and February same-store sales were impacted by severe weather. On Wednesday, Sonic Corp. announced that it expects second quarter same-store sales to be down 12 percent to 14 percent due to the weather.
Record snowfalls and cold temperatures buffeted the south central states in Sonic's second quarter, particularly in Texas and Oklahoma, where more than one-third of Sonic's drive-ins are located. Based on information provided to the company by a weather analytics service provider, the company estimates that inclement weather accounted for about two-thirds of the decline in same-store sales for the second quarter. Sales tax collections in these two states also were down by double digits compared with the prior year, reflecting lower consumer spending in many core markets.
Stephen Vaughan, Sonic senior vice president and chief financial officer, said during a presentation at the Bank of America Merrill Lynch 2010 Consumer Conference in New York City, that excluding the impact of weather, comps were down 4 percent to 5 percent.
Same-store sales at partner drive-ins (those in which the company owns a majority interest) were down approximately 15 percent for the same period.
FY 2020 initiatives
Management believes a number of current and planned initiatives will improve sales and earnings in the near term and longer term. These initiatives include a new messaging and promotional strategy, product quality improvements, highlighted by new product news, and a new media strategy:
- Sonic's new television commercials, implemented in February, are designed to highlight the brand's key points of differentiation, such as its drive-in format, skating carhops and high quality food. The new format will complement Sonic's "two guys" reality-based advertising format, which has been very successful.
- This spring, Sonic has chosen to refine its value strategy by pairing a full-priced premium sandwich with a free unique side item (such as handmade onion rings or tater tots). Sonic will continue to promote its distinctive products utilizing a unique value offering while consumer sentiment remains under pressure. It's current promotion includes a free medium order of Tots with the purchase of a SuperSonic Cheeseburger.
- Beginning in April, Sonic will further refine its media strategy by utilizing a portion of its national media resources to maximize local market media impressions. This strategy is intended to maximize impressions in the trade areas around Sonic drive-ins. Sonic will continue to have 12 months of national cable messaging and believes this improved mix of national and local media will best promote the Sonic brand in both core and newer markets.
These efforts, in conjunction with initiatives to improve customer service that were first implemented in fiscal 2009, are expected to have a positive impact on sales in the third and fourth quarter of fiscal 2010.
New product introductions for the coming quarter include a new sandwich in April, the Ched-R-Pepper Burger. The double-patty SuperSonic Cheeseburger will feature a thicker cheese, crinkle cut pickles and two cheddar-stuffed fried jalapeno peppers, Vaughan said at the conference. In May, the company will launch a new, improved real ice cream product. The goal is to strengthen the quality gap compared to competing QSRs.
Sonic also is rolling out additional equipment to extend the number of drink choices the chain offers, he said. Fountain and frozen drinks are the chain's primary menu item, and loyal fans enjoy customizing their drinks. The new equipment will boost the number of possible combinations well beyond the current 168,000.
Despite the near-term impact of weather and macro-economic factors on Sonic's business, management believes the longer-term fundamentals of the company remain solid. Sonic's franchising business model continues to generate sufficient operating cash flows to cover capital expenditures and scheduled principal payments of $52 million in fiscal 2010. In addition, the company has in excess of $125 million in cash and expects to utilize a significant portion of its cash resources for credit enhancements and/or share repurchases during the current fiscal year.
2010 guidance
In light of the second quarter developments, Sonic now anticipates that earnings for fiscal year 2010, excluding gains, will be from $0.55 to $0.60 per diluted share and comprise the following:
- System-wide same-store sales flat to down 5 percent in the second half of fiscal 2010
- New franchise drive-in openings of 80 to 90 for the fiscal year
- Unfavorable restaurant-level margins of approximately 100 to 150 basis points for the fiscal year, reflecting significant improvement in the second half of the year versus trend
- Depreciation and amortization of $42 to $43 million for the fiscal year
- A $4 to $5 million decline in interest expense reflecting lower debt levels for the fiscal year
- An income tax rate of 37.5% to 38.5% for the fiscal year
- Capital expenditures of $25 to $30 million for the fiscal year
Q2 release, conference call
Sonic plans to report its second quarter results at the market close on March 23. The company will provide an online web simulcast of its earnings release 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 April 23, 2010. A link to these events will be available at the investor section of the company's Web site.
A link to the Bank of America Conference webcast also can be found at the investor section of the company's Web site, and the event will be available for replay through March 23.
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