Will Sonic Continue to Boom?

Sonic’s innovation is key to its market share gains.

Jan 14, 2014 at 11:38AM

When it comes to quick-service restaurants, innovation is the name of the game lately as companies battle for consumers' tightly held dollars. As McDonald's (NYSE:MCD) is learning the hard way and Jack in the Box (NASDAQ:JACK) seems to be figuring out successfully, not just any innovation will work. Companies must be creative and resonate with the customer. Sonic (NASDAQ:SONC), the nation's largest chain of drive-in restaurants, appears to be continually doing just that while driving growth home for shareholders.

Sonic results
On Jan. 6, Sonic reported its first-quarter fiscal results. Systemwide same-store sales jumped 2.2%. Adjusted earnings per share leaped 18% to $0.13. Sonic bought back $7.5 million worth of shares as part of a $40 million buyback program.

The strong results come after the seasonally superior summer quarter, which saw even greater growth. Earnings per share soared 20% to $0.30 while systemwide same-store sales rose by 5.9%. Based on that quarterly report, Sonic then told shareholders to expect to see continued focus on "our innovative product pipeline."

For this quarter, CEO Cliff Hudson credited the continued success to "increased media effectiveness" and "layered day-part promotional strategy." Hudson stated that its strategies saw success across all markets. He named specifically the "Summer of Shakes" promotion as well as the company's new Spicy Chicken Sandwich and Cheesecake Bites.

In addition to these strategies, Hudson believes technology in the form of point-of-purchase and a new point-of-sale system will lead to increased sales and profits. This was similar to what Sonic mentioned in the previous report when it mentioned "new technology investments to enhance the guest experience." Hudson is calling for double-digit earnings percentage growth both near- and long-term.

Conference call
During the call, Hudson gave more specifics. He believes Sonic will see 14% to 20% earnings-per-share growth for the next several years. Sonic currently has 3,500 locations. Hudson stated, "We've got a lot of room to grow, particularly in new and developing markets." Current franchisees are adding stores while at the same time new franchisees are coming onboard with area development agreements. The expansion of restaurants plus additional product innovation gives Sonic confidence in its ability to grow at a rapid pace.

How does McDonald's stack up?
McDonald's is quickly discovering that adding menu items doesn't automatically mean success. Its recent Mighty Wings promotion was such a flop that McDonald's was stuck with 10 million pounds of frozen leftovers from its original batch of 50 million. Franchisees complained that they were too expensive, customers complained that they were too spicy, and everybody complained that the wings looked too similar to its nuggets. McDonald's saw same-store sales in the U.S. go from up 0.7% in the third quarter to only up 0.2% in October to down 0.8% in November. While Sonic's innovations are bringing in customers, McDonald's Mighty Wings seem to have alienated them.

What surprises does Jack in the Box hold?
Meanwhile, Jack in the Box is seeing success from its innovative measures. It recently launched a late-night munchies menu as well as several other new menu items. As a result, same-store sales are expected to improve from a decline of 0.2% last quarter to a gain of 1.5% to 2.5% for the holiday quarter. Jack in the Box expects gains of 2% to 4% annually through 2017.

Foolish final thoughts
Sonic continues to deliver solid performance and growth. The company has proven it can grow steadily by innovating carefully like Jack in the Box and in contrast to the Mighty Wings flop by McDonald's. Fools looking for reliable growth with a company in the quick-service industry should take a closer look at Sonic.

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Fool contributor Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool 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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