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Sonic Q3 net down 34.5%, appoints new CMO
June 21, 2010
Sonic Corp. continues to be impacted by the challenging economic environment, as evident in its third quarter earnings report. Meanwhile, the company also announced it has hired Danielle Vona to serve as chief marketing officer. Vona comes to Sonic from her position as a vice president of marketing at PepsiCo, where she handled all aspects of Propel brand marketing and Pepsi's flavored soft drink portfolio.
Vona joined Pepsi in 1999 from Tracey Locke, Pepsi's promotion agency of record, where she worked on marketing initiatives for a variety of Pepsi customers in a variety of channels. In addition, she worked with the Strategy Department developing programs and strategies for individual channels.
Vona has a bachelor of arts degree from Hofstra University in Hempstead, N.Y. She and her husband, Jeff, are moving to Oklahoma City with their three children.
Clifford Hudson, chairman and CEO of Sonic Corp., said, "We are pleased to have Danielle join our team. With her extensive knowledge of branding, packaging and customer research, she brings the necessary experience and perspective to Sonic. Additionally, Danielle has demonstrated leadership skills that will blend well with Sonic's marketing department, the organization generally and our franchisees. She will bring additional depth to our marketing team, which will, in turn, serve our operators and franchisees in their quest to deliver Sonic's quality products and unique carhop service."
Comps down 6%, gap narrows
Sonic Corp. also released results for the third quarter ended May 31, which includes a system-wide same-store sales decline of 6.0 percent vs. a decrease of 5.4 percent for the same quarter last year. Despite the continued decline in comps, Hudson said on the company's earnings call that he was pleased that the gap between franchise and partner drive-in sales was essentially closed. Comps at franchise drive-ins were down 6.0 percent for the quarter and down 6.3 percent at partner drive-ins.
Year to date, system-wide same-store sales were down 8.3 percent vs. a decrease of 4.3 percent last year. The decline in system-wide same-store sales for the first nine months of fiscal 2010 reflected 8.1 percent lower same-store sales at franchise drive-ins and a 9.9 percent decline at partner drive-ins.
"Sales continued to be challenged in the third quarter," Hudson said. "In this fourth quarter and beyond, we are committed to managing our business with initiatives that are aligned with our core brand strengths and are relevant to the consumer. We believe these steps, which include a new value promotion strategy, new messaging, a targeted media allocation strategy and, most recently, a product quality initiative, will result in improvements in performance.
"From a capital management perspective, we were very pleased to have purchased $58 million in debt in the third quarter," Hudson continued. "These purchases, combined with $50 million in principal payments in fiscal 2010, strengthen our balance sheet and reduce interest expense."
Hudson said on the call that the company's new value messaging, which emphasizes its differentiating service and premium products, is resonating with consumers. Instead of focus on the chain's value menu, its marketing focus is on special offers that pair a free order of tots or onion rings with full priced sandwich order. As a result, the company has been able to hold average check flat.
The brand's product quality improvements include new ice cream introduced last month and the upcoming launch next month of the quarter pound footlong Coney. Promotions for the new Coney will highlight the product improvements and quality.
The company will focus on promotions for its ice cream line throughout the summer, including a buy one, get one shake offer through the end of this month and a late evening $0.99 sundae special. Hudson said the BOGO shake offer has improved traffic in some dayparts and should augment lunch and dinner going forward.
Other initiatives include a targeted media allocation, which includes reallocating funds for the company's new footprint strategy in order to increase impressions in each trade radius around its drive-ins.
Hudson also said on the call that the company's emphasis on improved service contributed to narrowing the gap narrowed from a sales standpoint between franchised and partnered drive-ins. Restructuring of management compensation to reduce turnover also should help grow profitability at the store level.
Development
Sonic president Scott McLain said on the call that the company's development plans continue to be challenged "by ongoing franchisee uncertainty about business conditions and to a lesser degree, continued credit market challenges."
System-wide drive-in openings totaled 19 in the third quarter, including 18 franchise drive-ins, vs. 34 new systemwide drive-in openings during the third quarter of fiscal 2009, including 32 by franchisees.
Year to date, system-wide drive-in openings totaled 61, including 57 franchise drive-ins, vs. 100 in the year-earlier period, including 90 franchise drive-ins. Sonic currently expects that new franchise drive-in openings will total 80 to 85 for the full fiscal year. That expectation is lower than last year, despite positive impact from the new store development incentives, McLain said.
Those incentives were designed to reward franchisees opening multiple stores during the year as well as encourage development in some of more challenged and underpenetrated markets. Longer term prospects for development do remain sound.
Income statement overview
Revenues for the quarter were down 19 percent to $145.9 million compared to $181.1 million in the same period last year. The decline reflected a change in the company's revenue mix from refranchising 205 partner drive-ins during fiscal 2009, declining same-store sales at partner drive-ins and reduced royalty revenue due to the sales declines at franchised restaurants. Year to date, revenues were down 26 percent to $395.8 million compared to $534 million last year.
Net income for the quarter was down 34.5 percent at $11.0 million, or $0.18 per diluted share, vs. $16.8 million, or $0.27 per diluted share, last year. Special items include:
- A $0.03 tax benefit from the stock option exchange program completed in the third quarter of fiscal 2010.
- Gains of $0.11 per diluted share on the sale of partner drive-ins in the year-earlier quarter, partially offset by impairment charges totaling $0.08 per diluted share.
Excluding special items, net income for the third quarter in fiscal 2010 was $9.2 million, or $0.15 per diluted share, compared with $14.7 million, or $0.24 per diluted share, for the prior-year period.
Year to date, net income was down 49 percent to $16.6 million, or $0.27 per diluted share, from $32.6 million, or $0.53 per diluted share. Special items include:
- A $0.03 tax benefit from the stock option exchange program completed in the third quarter of fiscal 2010.
- Gains of $0.11 per diluted share on the sale of partner drive-ins, a gain on debt extinguishment of $0.06 per diluted share, and partially offsetting impairment charges totaling $0.08 per diluted share in the year-earlier period.
Excluding special items, net income for the first nine months of fiscal 2010 was $14.8 million, or $0.24 per diluted share, compared with $26.7 million, or $0.44 per diluted share, for the prior-year period.
Fiscal 2010 revised outlook
Based on Sonic's third quarter results and the anticipation of a continued challenging economic and credit market environment, management anticipates earnings for 2010 will total between $0.50 to $0.55 per diluted share compared with earnings of $0.72 per diluted share for fiscal 2009, excluding gains and provisions for impairment. This outlook is based primarily on the following:
- A system-wide 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; this estimate is based upon non-controlling interests being included in restaurant-level margins on a pro forma basis
- Capital expenditures for the year ranging from $25 to $30 million
"We believe the best path toward improved sales performance is to focus on implementation of our key strategic initiatives, which will further position us as a differentiated and quality quick-service restaurant," Hudson said. "The state of the economic recovery and ongoing consumer pressures will continue to be a challenge for us in the near term. At the same time, we believe that providing consumers a unique and fun experience, combined with a strong focus on customer service, high quality and distinctive products, will prove to be a winning formula for continued growth."
A replay of Sonic's third quarter conference call can be accessed at the company's websiteuntil July 21.
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