Why Did Sonic's Stock Drop After Earnings?

The drive-in business's stock is down after reporting solid Q1 results

Jan 8, 2014 at 3:46PM

Sonic's (NASDAQ:SONC) 2014 stock drop continued following its Q4 earnings call on Jan. 6. Its price per share has fallen from $20.19 on Jan. 1 to $19.25.  The fast food drive-in business has its work cut out for it, having to compete in a crowded space populated by such giants as Burger King Worldwide and Wendy's (NASDAQ:WEN). Here's what's behind the company's latest earnings report, and why the market wasn't crazy about it.

Missed the boat
Analysts were closely watching Sonic this go-around, expecting revenue for the quarter to be $128 million, with an EPS of $0.13 per share. Over the past five quarters, the fast food company has surpassed earnings per share expectations, although it has stumbled a couple of times on the revenue front.

For Q1 of 2014, Sonic again beat analyst estimates for EPS, clocking in at $0.14 per diluted share. Quarterly revenue, however, was just 0.5% higher than the same time last year, coming in at $126.6 million for the quarter. While that figure might have been stagnant, Sonic still had some positives to report. Overall same-store sales rose 2.2%, thanks to a boost in drive-in sales from franchise locations. It's good to see that kind of positive growth, but that number was also a little short compared to the 3% in same-store sales growth Sonic pulled in during the same time last year.

The cost of the commodity
One metric that practically every restaurant struggles with is the amount of money spent on the commodities to make its food products. Costs are constantly rising, but during its last quarter, competitor Wendy's saw Food and Paper take up 32.9% of its overall revenue, down slightly from 33.1% during the same time last year.

In Sonic's case, the drive-in company's food and packaging costs only took up 20.7% of its revenue this quarter, compared to 21.1% a year before. That upped the company's operating income from $17.2 million to $18.3 million, or 14% of overall sales, a slight improvement on Q1 2013's 13.6%. That Sonic is able to save money in this segment is impressive, given the company's tendency to rotate new menu items constantly. Those savings also appear to have trickled down into Sonic's raised net income of $8.2 million, especially when sized up next to last year's Q1 net income of $6.1 million.

How exactly was Sonic able to shave so much off its operating expenses this quarter? According to its quarterly conference call , through using a new supply chain management system that has helped lower its cost of inventory and given "greater transparency" to all aspects of the supply chain. Additionally, Sonic has begun using a point of sale (or POS) system that helps streamline its order process and minimize product waste. The company expects both these new tools to boost operating margins for the next several years.

Not-so tasty burger?
While revenue wasn't quite up to snuff for analysts for the quarter, that's no reason to dismiss Sonic as a weak fast-food company. Sales are still up compared to where they were a year ago, and operational costs are dropping, making for larger margins. Additionally, Sonic opened seven new franchise drive-ins over the quarter, an improvement on the sole location it opened during Q1 2013. There's clearly still some life in this burger-maker yet.

Fool contributor Caroline Bennett has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers