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Why Sonic Corporation Stock Got Zonked Today

By Jeremy Bowman – Oct 25, 2016 at 6:56AM

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

Image source: Sonic.

What happened

Shares of fast-food drive-in chain Sonic Corporation (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.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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