Why Sonic Corporation Stock Got Zonked Today

The fast-food chain tumbled on falling sales and weak guidance for 2017.

Jeremy Bowman
Jeremy Bowman
Oct 25, 2016 at 12:56PM
Consumer Goods

Image source: Sonic.

What happened

Shares of fast-food drive-in chain Sonic Corporation (NASDAQ:SONC) were tanking today after the company issued a weak fourth-quarter earnings report and even weaker guidance for fiscal 2017. The stock was down 17.4% as of 11:37 a.m. EDT.

So what

Sonic had already tried to muffle expectations with a downbeat preliminary earnings report in September that sent the stock 7% lower, but that wasn't enough.

Last night, it said same-store sales fell 2% in the quarter and 3% at company stores, with restaurant-level operating margins at company-owned stores slipping 210 basis points to 17%.

Adjusted earnings per share still ticked up 5% to $0.45, even though net income dropped as the company has been aggressively repurchasing shares, reducing its total count by 10%. Revenue was down 8% to $162.1 million due to ongoing refranchising. Analysts had expected EPS of $0.44 and revenue at $167.8 million.

Now what

After an unimpressive quarter, the company's guidance for 2017 essentially confirms talk of a restaurant recession. Management expects comparable sales to be between -2% and flat for the current year, and earnings per share to fall between 7% and 0% from $1.29 last year.

Sonic has been operating with a familiar playbook in the industry -- refranchising stores and using that cash to buy back stock. But with the stock now at a two-year low, the decision to buy back those shares at an elevated price looks questionable. The company has also been taking on nearly $150 million in debt to fund the buybacks, and plans to spend another $173 million on repurchases in 2017, which would reduce the stock by about 17% at its current value. That will create value for shareholders in the short term, but interest expense is already above 20% of operating income, and liabilities are now greater than assets on its balance sheet. With comparable sales expected to continue falling, the stock is likely to head south as well.