Why Sonic, Burger King, and McDonald's Are Worth Watching in a Difficult Restaurant Industry

As the inclement weather  waned, the restaurant-industry snapshot report from Blackbox Intelligence highlighted positive same-store sales, or comps, growth for the month of March. However, this wasn't enough to push the industry's same-store sales for the first quarter into positive territory. Whereas the weather tends to balance itself out, the restaurant industry is trying to solve the difficult puzzle of declining same-store traffic, which was a negative 2.2% year-over-year for the first quarter of this year .

Amid these industry trends, let's see how Sonic (NASDAQ: SONC  ) , Burger King Worldwide (NYSE: BKW  ) , and McDonald's (NYSE: MCD  ) performed in their last-reported quarters, and which of them deserves a place in your portfolio.

Sonic bucks the trend
Despite the bad weather, in its first quarter of fiscal 2014 Sonic witnessed system-wide comps growth of 1.4% versus the year-ago quarter . This is remarkable considering that the first quarter included the months of December through February, when the restaurant industry was struggling with negative comps.

Over the years, Sonic has been working to improve its product and service quality and strategic pricing. These initiatives helped Sonic rank second in the 2014 Temkin Experience Rating , based on feedback from consumers on their recent interactions with companies across the fast-food industry. This, along with the Two Guys promotional campaign, fueled system-wide comps growth. On the heels of positive comps and share buybacks, Sonic's earnings surged 40% versus the prior fiscal quarter .

The growth drivers
Sonic is focusing on menu innovation as one of its growth drivers. It recently modified its popular Master Blast desserts by adding six new flavors, with a focus on fruit lovers . It is also promoting 25 new flavors each for Summer of Slush and Summer of Shakes. Along with menu innovations, unit expansion is another growth driver. Sonic is primed for expansion with a goal of 1,000 new drive-in locations in the next 10 years , spanning markets that include Atlanta, California, and Florida.

As part of integrated customer engagement, or ICE, Sonic is upgrading its point-of-sale, or POS, systems to create a more personalized experience for its customers. Point-of-personalized-system, or POPS, technology will be integrated into the new POS systems. This is already working well at 250 company-owned locations, and the company plans to complete system-wide upgrades by 2016 .

Customer loyalty, menu innovations, unit expansions, and investments in supply chain management and promotions will be top- and bottom-line growth drivers for Sonic going forward.

Burger King moves in the right direction
Menu innovations, strong global performance, and simplification of in-restaurant operations helped Burger King post better-than-expected first-quarter fiscal 2014 results. The company registered positive comps across all four regions as it clocked global comps growth of 2% versus the year-ago quarter . Organically, sales jumped 6.9% versus the year-ago quarter in constant-currency terms.

On the heels of positive comps, cost-cutting initiatives, and good organic growth, Burger King beat the consensus estimate on the bottom line as it clocked earnings per share of $0.20, which represented 19.2% year-over-year growth .

Going forward, Burger King's menu improvement initiatives, cost-cutting initiatives, reimaging efforts, marketing promotions, and unit expansions will be its growth drivers. Its move toward the franchising business model will bode well even in a choppy restaurant environment.

A look at McDonald's
McDonald's started fiscal 2014 on a bad note, registering a sales decline of 1.7% versus the year-ago quarter. The company is facing stiff competition in the breakfast business as a result of $1 sandwiches from Burger King and similarly attractive offerings from Starbucks and others. The harsh winter weather in the U.S. made things difficult for the restaurateur as it attributed 1.4% of the sales decline to the weather.

To arrest the downward spiral going forward, McDonald's is offering free McCafe coffee at its domestic stores and it has also introduced a new Clubhouse burger. The fast-food giant is aiming to strengthen its position by offering value propositions and an innovative menu.

McDonald's is focusing on four priority markets -- the U.S., Germany, China, and Australia. The company is also focusing on staffing, scheduling, and positioning to ensure peak hour availability for the crew. By the middle of this year, it plans to equip all of its units in the U.S. with new high-density kitchen preparation tables in order to speed up preparation and facilitate the future addition of new toppings for sandwiches. These moves should help McDonald's get better going forward.

The bottom line
These three chains have performed differently in their recent quarters, with Sonic and Burger King seeing positives in their businesses. McDonald's, on the other hand, is aiming for a turnaround with its moves. So investors should definitely take a closer look at all three companies since they could be good prospects going forward.

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