Drive-in fast-food chain Sonic (SONC +0.00%) is expected to report earnings for the first quarter of fiscal 2014 on Monday, Jan. 6. The company faces close competition ifrom Wendy's (WEN +1.40%), which has a similar growth story and cost problem. But Sonic also competes with general fast-food establishments such as Burger King Worldwide (BKW +0.00%) and Yum! Brands (YUM 0.37%).
What should investors watch for in Sonic's first-quarter earnings release?
Quarterly numbers to beat
Analysts estimate first-quarter revenue of $128 million with earnings per share of $0.13. Sonic has met or beat EPS estimates for the past five quarters but missed revenue on two of those quarters.
Investors and analysts will compare results from the first quarter of fiscal 2014 to the first quarter of the previous year, when revenue was $126 million and EPS was $0.11. Same-store sales were up 3% overall in last year's quarter, with a 4% increase at corporate-owned drive-ins, which accounted for almost three-quarters of total revenue in that quarter.
Fourth-quarter results included $159 million in revenue and EPS of $0.30. Same-store sales were up nearly 6% overall, with matching growth in franchise drive-ins and more than 5% growth at company-owned drive-ins.
Watch the food costs
Sonic's diverse and rotating menu leads to higher food costs than at some competitors. But the company did a good job of keeping costs level in 2013. Food and paper costs as a percentage of revenue hovered right around 21% all year.
Wendy's similar menu slant kept that company's costs up at 33%. Yum! Brands' multiple restaurants -- which include KFC and Pizza Hut -- keep costs up near 30%. Burger King is the only chain reducing costs, having dropped from 12% in the first quarter to 3% in the third.
So it's not a huge issue if Sonic's first-quarter costs stay steady with the prior year, but a reduction would help margins. And a spike up means investors should watch this metric closely in the following quarter to see if it was a one-time or long-term issue.
Competitor comparison
Burger King's third-quarter report in October featured revenue of $275 million and EPS of $0.23. Global comparable-store sales were up about 1%, but North American comps were down 30 basis points.The company has met or beat EPS estimates for the past five quarters but missed on revenue for one of those quarters. Analysts' estimates for the fourth quarter include revenue of $281 million and EPS of $0.23.
Yum! Brands' third quarter met revenue estimates with $3.5 billion but missed on EPS with a net loss of $0.85. Comps were flat domestically but had a low-double-digit drop in China thanks to a poultry supplier controversy for KFC. Fourth-quarter analyst estimates include $4.3 billion in revenue and EPS of $0.80.
Wendy's third quarter met revenue estimates of $641 million after missing on the prior four quarters. Comps increased more than 3% as Wendy's rode the popularity of the Pretzel Bacon Cheeseburger, which the restaurant has since discontinued in favor of rotating limited-edition items. (I've gone on record questioning this "limited" tactic.) Analysts estimate fourth-quarter revenue of $615 million and EPS of $0.06.
Foolish final thoughts
Sonic has a decent history of meeting or beating revenue and EPS estimates. And the few misses were narrow. Keep an eye on the food costs and the comps for a quick take on Sonic's overall health.
