On June 20, Sonic (NASDAQ:SONC) will announce earnings for the third quarter of fiscal year 2006, followed on June 21 by the earnings conference call. The stock price has fallen about 9% from its recent high near $23.65, after climbing rapidly from its low of $17.77 (all prices adjusted for the recent 3:2 stock split). Piper Jaffray recently downgraded this stock, but management has reaffirmed its guidance. Read on to see what you might expect following the earnings announcement.

What analysts say:

  • Buy, sell, or waffle? Analysts are fairly evenly split, with seven rating it a buy or strong buy, while eight recommend a hold.
  • Revenues. Eleven analysts weigh in with a consensus figure of $189.7 million for the quarter, 13% higher than last year.
  • Earnings. Sixteen analysts spoke up here, expecting a consensus $0.26 in earnings per share (EPS), up 13% from the year-ago quarter (as adjusted for stock-based compensation). This is at the low end of company guidance of $0.26-$0.27 per share.

What management says:
In announcing the company's recent 3:2 stock split, the press release had Clifford Hudson -- Sonic's chairman, chief executive officer, and president -- noting that this decision "reflected Sonic's continued strong performance as well as the company's positive outlook for future earnings growth." Further, he said, "We believe this stock split will place the market price of Sonic's common stock in a more attractive range for investors ... we also believe this action will help increase the liquidity of the company's common stock." (Of course, Foolish investors know that stock splits are a non-event as far as performance and future earnings growth are concerned.)

In announcing last quarter's results, Mr. Hudson said, "strong sales momentum [was] maintained through the winter months, driven by new product news and backed by increasing and strategic media expenditures that have promoted continued growth." In other words, the company introduced more healthy fare, which it promoted with advertising. This is especially good considering the recent lawsuit filed against Kentucky Fried Chicken, owned by Yum! Brands (NYSE:YUM), for using unhealthy trans fats in its cooking. With its new healthy take, Sonic may be able to capitalize on KFC's misfortune.

What management does:
Stock-based compensation has been included in the company's financial statements since the fiscal year's first quarter, ending last November. This likely contributed to the slight drop in rolling operating and net revenue margins, seen below, since the numbers used before then did not include that expense. Increased advertising also contributed.

Sales growth has slowed way down since the end of November 2004. This seems to be a combination of lower same-store sales growth (5.5% in the February quarter versus 7% in the February quarter last year) and a lower number of new locations being opened (5.3% more in the February quarter versus 5.8% more in the February quarter last year), though other factors could be contributing as well.

Margins %*

11/04

2/05

5/05

8/05

11/05

2/06

Gross**

77.8

77.7

77.7

77.9

77.9

77.9

Operating

19.8

19.8

19.9

19.9

19.5

19.3

Net

11.8

11.9

12.1

12.1

11.8

11.6

Sales Growth %***

19.8

18.8

14.9

12.7

12.4

12.3

* Trailing-12-month data for quarter ending in month indicated.
** Based on gross profit defined as sales less cost of food.
*** Year-over-year comparison for quarter ending in month indicated.
All data as reported from relevant company 10-K and 10-Q filings.

One Fool says:
In the last quarter, EPS increased about 20% year over year, after taking stock-based compensation expense into account, which was faster than the sales growth in the above table. About 30% of that EPS growth came from a decrease in the number of diluted shares, as last quarter's net income grew 14.5% year over year. When earnings are reported tomorrow, watch carefully to see how much of that is a real increase in net earnings, and how much is due to a lowered share count. With earnings-per-share growth expected to pace revenue growth this time, I would expect almost all of the EPS growth to come from net income growth.

If Sonic meets the expected 13% growth in revenue and beats the predicted 3%-5% same-store sales growth as they did last quarter, then the decline in sales growth could be over. Investors should keep an eye on this in upcoming quarters. While growth may not return to the 19%-20% levels seen previously, stopping the slide is important. Continued implementation of credit card payment directly from the customer's car -- the PAYS system -- will help in this.

Competitors:

  • Yum! Brands
  • McDonald's (NYSE:MCD)
  • Wendy's (NYSE:WEN)
  • Burger King (NYSE:BKC)

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Fool contributor Jim Mueller does not own shares in any company mentioned.