At a time when big fast-food players such as McDonald's (NYSE: MCD ) and Yum! Brands (NYSE: YUM ) are reporting stagnant sales in the U.S., Sonic (NASDAQ: SONC ) announced on Monday better-than-expected numbers for the quarter ended on May 31. Management is clearly taking Sonic in the right direction, and the company still has considerable room for growth. Is it time to take a bite of this delicious fast-food company?
Total sales during the quarter ended on May 31 increased 3.8%, from $146.6 million to $152.2 million; this was better than the $148.6 million forecast on average by analysts.
Annual comparisons were negatively affected by a reduction in the quantity of drive-ins in operation versus the same period in 2013. Sonic ended the quarter with 3,510 drive-ins, including both company-operated and franchised ones, versus 3,526 drive-ins at the end of the same quarter last year.
On a sequential basis, the company increased the total drive-ins count by three units, with 10 openings and seven closings during the quarter. This means that Sonic should be able to produce accelerating sales growth as the company moves beyond the store restructuring phase into store expansion.
Management is planning to open 15 to 20 new drive-ins in the next quarter, and it believes it can consistently open between 40 and 50 new drive-ins per year, so new store openings should be a considerable growth driver in the years ahead.
Same-store sales performance was quite strong during the quarter. Systemwide same-store sales increased 5.3%, on the back of a 5.3% increase in same-store sales at franchise drive-ins and an increase of 5.2% at company drive-ins.
Operating margin expanded 30 basis points, to 20.8% of sales versus 20.5% in the same quarter of 2013, and earnings per share jumped 15%, from $0.26 to $0.30 per share. This was $0.01 above analysts' forecasts of $0.29 per share on average for the quarter.
CEO Clifford Hudson sounded quite pleased with the company's performance in the earnings press release, and he also provided an optimistic view of the future:
Same-store sales for the quarter were especially strong, driven by our innovative product news, layered day-part promotional strategy and increased media efficiency. The multiple initiatives we have in place to increase sales, profits and new drive-in development are working together nicely to optimize shareholder value.
We are confident our multi-layered growth strategy, which incorporates same-store sales growth, leverage from higher sales, deployment of free cash flow, increasing royalty revenues and new drive-in development, will continue to result in double-digit earnings-per-share growth in the near and long term.
Outperforming the competition
Sonic's performance looks even more impressive when compared to the uninspiring numbers being reported by fast-food giants such as McDonald's and Yum! Brands lately. Market saturation and the trend toward healthier nutrition represent a considerable challenge for many companies in the industry, and both McDonald's and Yum! Brands are feeling the pressure.
McDonald's is facing serious difficulties in the U.S., menu innovations have not yielded the desired results, and the quality of the service has suffered because of increased operational complexities. Management has decided to go back to the basics and focus on improving service and food quality, but initiatives to jump-start growth don't seem to be working so far.
McDonald's reported a 1% decline in comparable sales in the U.S. during May; this was the seventh consecutive month of declining same-store sales in the country, so McDonald's is facing a pervasive slowdown in its main market.
Yum! Brands is not doing much better than McDonald's in the U.S., as the company announced declining same-store sales during the first quarter of 2014, and performance was materially weak across Yum! Brands' different divisions.
Yum! Brands announced a 3% decline in KFC same-store sales in the U.S. during the quarter, while same-store sales in the Pizza Hut division fell by an even bigger 5% during the period. Taco Bell did relatively better, but same-store sales in the U.S. still declined by 1% during the quarter.
The first quarter of the year was a particularly challenging one due to the unusually cold winter, so Yum! Brands may deliver better numbers for the second quarter as the weather becomes less of a problem. Still, there is hardly any reason to expect much in terms of sales growth from Yum! Brands and McDonald's in the medium term.
Sonic delivered impressive financial performance for the last quarter, especially when compared against stagnant industry giants such as McDonald's and Yum! Brands. Management is clearly leading the company in the right direction, and the future looks quite promising. This dynamic fast-food chain is well positioned to continue delivering tasty returns in the years ahead.
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