Sonic Reports Third Quarter 2010 Results
System-wide same-store sales declined 6.0% during the third quarter; same-store sales at partner drive-ins declined 6.3% in the quarter
Sonic Corp. (NASDAQ: SONC), the nation's largest chain of drive-in restaurants, today announced results for the third fiscal quarter ended May 31, 2010. Key aspects of the company's third quarter report included:
“These purchases, combined with $50 million in principal payments in fiscal 2010, strengthen our balance sheet and reduce interest expense.”
- Net income per diluted share totaled $0.18 versus net income per diluted share of $0.27 in the year-earlier quarter;
- System-wide same-store sales declined 6.0% during the third quarter; same-store sales at partner drive-ins declined 6.3% in the quarter;
- Franchise drive-in openings totaled 18 for the quarter versus 32 in the same period last year; and
- Sonic completed the purchase of $58 million of its class A-2 senior fixed-rate notes using excess cash.
"Sales continued to be challenged in the third quarter," said Clifford Hudson, Chairman and Chief Executive Officer. "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."
Income Statement Overview
For the third quarter ended May 31, 2010, revenues declined 19% to $145.9 million from $181.1 million in the year-earlier period, reflecting 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. Net income for the quarter was $11.0 million or $0.18 per diluted share versus $16.8 million or $0.27 per diluted share in the same quarter last year. Special items include:
- A $0.03 tax benefit from the stock option exchange program completed in the third quarter of fiscal 2010; and
- 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.
For the first nine months of the fiscal year, revenues declined 26% to $395.8 million from $534.0 million in the prior year. Net income on a year-to-date basis was $16.6 million or $0.27 per diluted share. Net income in the same period last year was $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; and
- 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.
Same-Store Sales
For the third fiscal quarter ended May 31, 2010, system-wide same-store sales declined 6.0% versus a decrease of 5.4% for the same quarter last year and reflected 6.0% lower same-store sales at franchise drive-ins and a 6.3% decline at partner drive-ins. For the first nine months of fiscal 2010, system-wide same-store sales declined 8.3% versus a decrease of 4.3% in the prior-year period. The decline in system-wide same-store sales for the first nine months of fiscal 2010 reflected 8.1% lower same-store sales at franchise drive-ins and a 9.9% decline at partner drive-ins.
Development
System-wide drive-in openings totaled 19 in the third quarter, including 18 franchise drive-ins, versus 34 new system-wide drive-in openings during the third quarter of fiscal 2009, including 32 by franchisees. For the first nine months of fiscal 2010, system-wide drive-in openings totaled 61, including 57 franchise drive-ins, versus 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.
Concluding Comments
"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."
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% to 8% 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;
- 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% and 38.5% for the fourth quarter; and
- Capital expenditures for the year ranging from $25 to $30 million.
About Sonic
Sonic, America's Drive-In, originally started as a hamburger and root beer stand in 1953 in Shawnee, Okla., called Top Hat Drive-In, and then changed its name to Sonic in 1959. The first drive-in to adopt the Sonic name is still serving customers in Stillwater, Okla. Sonic has more than 3,500 drive-ins coast to coast, where approximately three million customers eat every day.
| SONIC CORP. | ||||||||||||||||
| Unaudited Supplemental Information | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Third Quarter Ended
May 31, |
Nine Months Ended
May 31, |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Statement of Operations | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Partner Drive-In sales | $ | 108,752 | $ | 144,279 | $ | 298,963 | $ | 439,034 | ||||||||
| Franchise Drive-Ins: | ||||||||||||||||
| Franchise royalties | 32,807 | 33,399 | 86,621 | 88,830 | ||||||||||||
| Franchise fees | 854 | 1,350 | 1,936 | 3,372 | ||||||||||||
| Other | 3,509 | 2,029 | 8,306 | 2,813 | ||||||||||||
| 145,922 | 181,057 | 395,826 | 534,049 | |||||||||||||
| Costs and expenses: | ||||||||||||||||
| Partner Drive-Ins: | ||||||||||||||||
| Food and packaging | 30,031 | 39,457 | 82,393 | 121,113 | ||||||||||||
| Payroll and other employee benefits | 37,991 | 45,204 | 102,467 | 142,530 | ||||||||||||
| Other operating expenses | 25,256 | 30,365 | 72,214 | 96,913 | ||||||||||||
| 93,278 | 115,026 | 257,074 | 360,556 | |||||||||||||
| Selling, general and administrative | 17,096 | 16,420 | 50,552 | 48,882 | ||||||||||||
| Depreciation and amortization | 10,645 | 11,454 | 31,958 | 37,002 | ||||||||||||
| Provision for impairment of long-lived assets | 188 | 7,489 | 188 | 7,903 | ||||||||||||
| 121,207 | 150,389 | 339,772 | 454,343 | |||||||||||||
| Other operating income | ||||||||||||||||
| Gains (losses) on sale of Partner Drive-Ins | (61 | ) | 10,846 | (677 | ) | 10,917 | ||||||||||
| (61 | ) | 10,846 | (677 | ) | 10,917 | |||||||||||
| Income from operations | 24,654 | 41,514 | 55,377 | 90,623 | ||||||||||||
| Interest expense | 9,036 | 10,311 | 28,426 | 33,439 | ||||||||||||
| (Gain) loss from early extinguishment of debt | 314 | -- | 314 | (6,382 | ) | |||||||||||
| Interest income | (251 | ) | (400 | ) | (744 | ) | (1,084 | ) | ||||||||
| Net interest expense | 9,099 | 9,911 | 27,996 | 25,973 | ||||||||||||
| Income before income taxes | 15,555 | 31,603 | 27,381 | 64,650 | ||||||||||||
| Provision for income taxes | 3,450 | 10,049 | 6,538 | 20,426 | ||||||||||||
| Net income - including noncontrolling interest | 12,105 | 21,554 | 20,843 | 44,224 | ||||||||||||
| Net income - noncontrolling interest | 1,139 | 4,781 | 4,289 | 11,670 | ||||||||||||
| Net income - attributable to Sonic Corp. | $ | 10,966 | $ | 16,773 | $ | 16,554 | $ | 32,554 | ||||||||
| Net income per share attributable to Sonic Corp: | ||||||||||||||||
| Basic | $ | 0.18 | $ | 0.28 | $ | 0.27 | $ | 0.54 | ||||||||
| Diluted | $ | 0.18 | $ | 0.27 | $ | 0.27 | $ | 0.53 | ||||||||
| Weighted average shares used in calculation: | ||||||||||||||||
| Basic | 61,434 | 60,886 | 61,215 | 60,664 | ||||||||||||
| Diluted | 61,697 | 61,215 | 61,532 | 61,191 | ||||||||||||
|
In accordance with Accounting Standards Codification (ASC) Topic 810, “Consolidation," net income (after tax) attributable to noncontrolling interest, previously referred to as Minority Interest in Earnings of Partner Drive-Ins and reported on a pre-tax basis under Costs and Expenses-Partner Drive-Ins, is now reported separately from the net income of the controlling interest also on a pre-tax basis. The change in presentation has no effect on the company's reported net income. |
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| SONIC CORP. | ||||||||||||
| Unaudited Supplemental Information | ||||||||||||
| Third Quarter Ended
May 31, |
Nine Months Ended
May 31, |
|||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||
| Drive-Ins in Operation: | ||||||||||||
| Partner: | ||||||||||||
| Total at beginning of period | 457 | 669 | 475 | 684 | ||||||||
| Opened | 1 | 2 | 4 | 10 | ||||||||
| Acquired from (sold to) franchisees | -- | (177 | ) | (16 | ) | (194 | ) | |||||
| Closed | -- | (2 | ) | (5 | ) | (8 | ) | |||||
| Total at end of period | 458 | 492 | 458 | 492 | ||||||||
| Franchise: | ||||||||||||
| Total at beginning of period | 3,103 | 2,842 | 3,069 | 2,791 | ||||||||
| Opened | 18 | 32 | 57 | 90 | ||||||||
| Acquired from (sold to) company | -- | 177 | 16 | 194 | ||||||||
| Closed (net of reopening) | (9 | ) | (17 | ) | (30 | ) | (41 | ) | ||||
| Total at end of period | 3,112 | 3,034 | 3,112 | 3,034 | ||||||||
| System-wide: | ||||||||||||
| Total at beginning of period | 3,560 | 3,511 | 3,544 | 3,475 | ||||||||
| Opened | 19 | 34 | 61 | 100 | ||||||||
| Closed (net of reopening) | (9 | ) | (19 | ) | (35 | ) | (49 | ) | ||||
| Total at end of period | 3,570 | 3,526 | 3,570 | 3,526 | ||||||||
|
Note: Partner Drive-Ins are those Sonic Drive-Ins in which the company owns a majority interest, typically at least 60%. |
||||||||||||
| SONIC CORP. | ||||||||||||||||
| Unaudited Supplemental Information | ||||||||||||||||
| ($ in thousands) | ||||||||||||||||
| Third Quarter Ended
May 31, |
Nine Months Ended
May 31, |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Sales Analysis | ||||||||||||||||
| Partner Drive-Ins: | ||||||||||||||||
| Total sales | $ | 108,752 | $ | 144,279 | $ | 298,963 | $ | 439,034 | ||||||||
| Average drive-in sales | 238 | 249 | 642 | 689 | ||||||||||||
| Change in same-store sales | -6.3 | % | -7.7 | % | -9.9 | % | -6.8 | % | ||||||||
| Franchise Drive-Ins: | ||||||||||||||||
| Total sales | $ | 854,109 | $ | 861,645 | $ | 2,288,545 | $ | 2,312,731 | ||||||||
| Average drive-in sales | 279 | 295 | 749 | 811 | ||||||||||||
| Change in same-store sales | -6.0 | % | -4.9 | % | -8.1 | % | -3.7 | % | ||||||||
| System-wide: | ||||||||||||||||
| Change in total sales | -4.3 | % | -0.9 | % | -6.0 | % | 0.6 | % | ||||||||
| Average drive-in sales | $ | 272 | $ | 287 | $ | 733 | $ | 789 | ||||||||
| Change in same-store sales | -6.0 | % | -5.4 | % | -8.3 | % | -4.3 | % | ||||||||
|
Note: Change in same-store sales based on drive-ins open for at least 15 months. |
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| SONIC CORP. | ||||||||||||||
| Unaudited Supplemental Information | ||||||||||||||
| ($ in thousands) | ||||||||||||||
| Third Quarter Ended
May 31, |
Nine Months Ended
May 31, |
|||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||
| Margin Analysis
(percentage of Partner Drive-In sales) |
||||||||||||||
| Partner Drive-Ins: | ||||||||||||||
| Food and packaging | 27.6 | % | 27.3 | % | 27.6 | % | 27.6 | % | ||||||
| Payroll and employee benefits | 34.9 | % | 31.3 | % | 34.3 | % | 32.5 | % | ||||||
| Other operating expenses | 23.2 | % | 21.0 | % | 24.2 | % | 22.1 | % | ||||||
| Cost of sales, as reported | 85.7 | % | 79.6 | % | 86.1 | % | 82.2 | % | ||||||
| Noncontrolling interest | 1.0 | % | 3.3 | % | 1.4 | % | 2.7 | % | ||||||
| Pro forma cost of sales, including noncontrolling interest | 86.7 | % | 82.9 | % | 87.5 | % | 84.9 | % | ||||||
| May 31,
2010 |
Aug. 31,
2009 |
|||||||||||||
| Balance Sheet Data | ||||||||||||||
| Current assets | $ | 124,787 | $ | 202,132 | ||||||||||
| Property, equipment and capital leases, net | 510,864 | 523,938 | ||||||||||||
| Total assets | 749,818 | 849,041 | ||||||||||||
| Current liabilities, including capital lease obligations and long-term debt due within one year | 111,149 | 117,319 | ||||||||||||
| Obligations under capital leases due after one year | 33,651 | 36,516 | ||||||||||||
| Long-term debt due after one year | 549,985 | 646,851 | ||||||||||||
| Total liabilities | 733,766 | 851,393 | ||||||||||||
| Stockholders' equity (deficit) | 16,052 | (2,352 | ) | |||||||||||
