Fool on the Street: Sonic Gains Weight

Most days, I wish I could be like Warren Buffett -- as much for his diet as his investing acumen. Buffett is legendary for subsisting on Cherry Coke and cheeseburgers. Sounds dandy to me.

It's probably an equally appetizing thought for thousands of others, many of whom frequent Sonic (Nasdaq: SONC  ) , the throwback drive-in that'll deliver chili-smothered burgers right to your car door. Earlier this month, executives from the would-be burger king presented their strategy to analysts at the CIBC World Market 7th Annual Consumer Growth conference. Let's listen in.

Don't you bring that weak tot action
To hear executives tell it, investors are beginning to think that Sonic has become irrelevant. Here's CEO Clifford Hudson:

We are the largest drive-in chain in the country ... Average unit volume is now over $1 million, as a matter of fact, approaching $1.1 million. [We've had] 20 consecutive years of positive same store sales and we're confident the fiscal year we're completing next month ... will be our 21st consecutive year of positive same store sales.

Translation: Our one-year chart stinks. Our last earnings report was OK at best. But we're still No. 1! Woohoo!

Sorry, I don't mean to make fun. Well, OK, yes I do. But I tend to agree with Hudson. Sonic is a terrific business with a very fun brand that I believe has mass appeal. I still get a laugh over the ads that aired during the NCAA men's college basketball tournament. (Rejected!)

But there's more than fun at work here. Sonic stands apart from peers McDonald's (NYSE: MCD  ) , Wendy's (NYSE: WEN  ) , and Yum! Brands (NYSE: YUM  ) for its aggressive use of national TV advertising, introducing its concept to locales that have yet to see one of its signature drive-ins.

The result? Anticipation. Says Hudson: "Our average unit volume in these newer drive-ins, in these newer states, [where] we've had several years of national advertising ... are averaging over $2 million in sales."

For perspective, that's nearly twice Sonic's systemwide average unit volume. And it bodes well as Sonic expands into big Northeastern markets. New York has yet to receive a Sonic drive-in, for example. Massachusetts and New Jersey also remain untapped. Michigan, too.

Management, for its part, plans to take advantage. During 2007, Sonic is on pace to open between 180 and 190 new restaurants, up from 173 last year and the most since 2004, when 188 locations made their debut.

Large and in charge
Technology is also key to Sonic's growth strategy. Four years ago, Sonic rolled out a credit card payment system called -- surprise! -- PAYS. Since then, credit card purchases have come to represent roughly 30% of all transactions.

But investors should really be enticed by what happens when patrons pull out the plastic. Hudson says that the average check rises by 40% -- from $5 to $7 -- when customers choose to pay with credit rather than cash. Bonus.

Do I look fat?
Sonic is also remaking itself in other ways, including remodeling the look of its restaurants to a longer, slimmer canopy that should allow more patrons to sidle up and enjoy a coney dog in the sweet summer air. As Hudson puts it:

Our latest retrofit ... in the '90s [had] a very positive impact on same store sales growth. We're now moving through the rollout phase of [a new] retrofit in our partner drive-ins ... I think it's an elevating appearance of the brand.

Yet even as Sonic's retro-modern redesign gives its drive-ins that slimming feel, Sonic the company is getting, well, fatter. Management agreed to take on more than $500 million in new debt over the past year for the purpose of buying back shares. Was it a good move? Chief financial officer Steve Vaughn seems to think so:

... Over the last four years or so, we have maintained ... a lightly leveraged balance sheet ... between 1 and 1.8 times adjusted debt to adjusted EBITDA. This past year ... we made a decision to accelerate share repurchase[s], and we [have] increased our leverage to about 3.8 times debt to EBITDA. We do believe that's a figure that we're very comfortable with, and don't feel like that, from a financial risk standpoint, it in any way hinders our ability to grow our brand, or execute our business plan.

Perhaps, but the 15,918 shares Sonic repurchased in October were bought for $23.00 apiece. The stock trades for a shade less than $22 today. Not good. Over time, management will have to earn excess returns from buybacks in order to cook up tasty results for shareholders.

The Foolish bottom line
Some of us look good with a few extra pounds. Some of us don't. Sonic only recently jumped a weight class, and it's too soon to tell whether the image fits. Nevertheless, with so much room to grow, I think we'll come to like Sonic pleasantly plump. Maybe even a little fat.

So go ahead, Fool, indulge yourself. Your portfolio could use the protein.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Find Tim's portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy will have a SONIC Cheeseburger with chili and cheese and a large Mountain Dew, to go.


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