This Restaurant Chain Is Doing the Happy Snow Dance
You know you're about to read an uplifting earnings report for a restaurant chain when it begins with "same-store sales grow in spite of difficult weather." This is even more true of Sonic Corporation , which bills itself as the nation's largest chain of drive-in restaurants. While other chains such as McDonald's and Bob Evans have been snowed in this winter, Sonic has been able to rise above the cold and is getting ready for its spring and summer seasons.
The booming results
On March 24, Sonic reported its fiscal second-quarter results for the three months ending in February. Systemwide same-store sales popped 1.4%. Earnings per share exploded 40% to $0.07. Even profit margins improved by 0.8%. The gains came despite "difficult weather that affected many of [its] markets."
CEO Cliff Hudson credited the success to "multiple systemwide initiatives such as increased media efficiency, innovative products and layered day-part promotions." He added, "These initiatives complement our focus on service, products and pricing. During the quarter we also began to roll out our technology initiatives, as well as signed new franchise development agreements for the development of 26 new drive-ins."
Hudson is calling for higher same-store sales growth, further expansion of the number of restaurants, and double-digit earnings-per-share growth both in the near term and the long term. The company plans to buy back $80 million worth of stock, which is about a 6% return on capital based on the current market cap.
The power of the brand
To illustrate just how powerful the brand is becoming, consider that it is one of the most seasonally affected restaurant chains in the nation. Since it's mostly an "outdoor" restaurant, even a mere change just in temperature can have a measurable impact on business. Sonic estimates the severe winter impact cost the company between 2% and 3% of same-store sales growth. Despite this, the company was still able to post a 1.4% gain, which wasn't too far from the 2.2% gain it had in the first quarter just prior.
In the conference call, Hudson pointed out that its marketing campaigns have shifted from local to national. "We shifted more of our local media dollars to national cable," he said. "And this really resulted in a significant increase in brand and ad awareness. It gave us a real spike in share of voice among our competition." It appears to be paying off.
Sonic plans to leverage this brand with a lineup of new products and promotions this warmer season, including "Summer of Slush," with 25 new Slush flavors. The company believes a lot of the new food products coming out will allow it to compete even with fast-casual and casual-dining restaurants, even though Sonic is considered a quick-service restaurant (aka, fast food).
It's somewhat ironic that Sonic has been able to beat the snow against the competition and this summer it will try to beat the competition again with "snow"-filled drinks that it calls Slush.
Bob Evans and Mickey D's are frozen stiff
Bob Evans Farms started November relatively fine with a 0.4% same-store sales gain. Then the brutal winter hit. Bob Evans saw sales fall by 1.7% in December, drop 4.7% in January, and plunge 6.7% in February. The reason was "sustained and severe winter weather of a magnitude not seen in many years." This was especially true for the Midwestern region, which is not used to this severity of storms, and that region happens to be Bob Evans' core market. The chain just couldn't handle it like Sonic did.
McDonald's is a similar story. While its worldwide same-store sales have been reasonably OK, its domestic same-store sales have been getting beat up a bit. Its tumble began last November with a 0.8% decline. McDonald's followed with a 1.5% to 2% slip in December, a 3.3% tumble in January, and a 1.4% fall in February. McDonald's cited the reason as "challenging industry dynamics and severe winter weather." Again, it couldn't keep its head above water (or is it ice?) like Sonic did.
Foolish final thoughts
Since Sonic was able to do this well with this cold at a time when drive-in restaurants are one of the last places you might normally think about, the company may be poised to have a breakout summer in terms of sales and bottom-line profits. Fools should take a closer look. Sonic trades with a P/E in the low 20s based on next year's analysts-estimated earnings, which seems like a long-term good value considering the aggressive share buybacks and long term double-digit earnings-per-share growth expectations.
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The article This Restaurant Chain Is Doing the Happy Snow Dance originally appeared on Fool.com.Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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