Sonic Drive-In (NASDAQ:SONC) was named one of this year's top franchises by Entrepreneur Magazine for a reason. With 3,500 locations, the company franchises and operates the largest chain of drive-in restaurants in the U.S. today. Franchises account for more than 89% of these restaurants. This is a smart strategy for a public company like Sonic, because the franchise model increases profitability by offering a steady stream of revenue in the form of rent and royalty income.
It is not surprising, then, that the franchise model is widespread in the United States. In fact, franchise establishments will employ a staggering 8.5 million Americans this year and create $840 billion in sales, according to research from IHS Global Insight. Whether you are a potential franchisee or a stock investor looking to unlock serious growth, here is a look at how Sonic Drive-In measures up as a top franchise company today.
A Sonic boom
Sonic has been a franchise-driven business for more than 55 years. This has enabled the company to grow its footprint to reach more than 44 states, without fronting all of the costs necessary to promote a national quick-service chain. In 2013, franchise partners agreed to build 79 new drive-ins in the years ahead. Moreover, Sonic's franchise drive-in sales increased 2.8% last year to $3.4 billion. This is important because, similar to most quick-service restaurant franchises, Sonic collects rent and royalty fees based on a percentage of sales.
Sonic is still relatively small compared to other top franchises such as Dunkin' Brands (NASDAQ:DNKN). The rival restaurant chain in 2013 pulled in more than double the franchise sales of Sonic Drive-In. Through its network of nearly 11,000 franchised doughnut and coffee shops, Dunkin' Brands' franchisees generated $6.7 billion in U.S. sales in 2013. Potential franchise owners also need to pony up more cash to qualify for an opportunity to run their own Sonic. If you want to own a Sonic's franchise, you need a net worth of roughly $1 million, compared to just $250,000 for Dunkin' Brands .
Therefore, if you want to take a bite out of Sonic it might make more sense to own the stock than to buy a franchise. With franchisees sharing the burden of overhead costs, Sonic has cash left over to reinvest in the business and to enhance shareholder value in the form of share buybacks. The stock has climbed more than 18% in the past year to trade at about $21 per share.
Sonic's strong brand and relatively small size could leave a long runway of growth ahead for the stock, as the chain opens franchises in new markets in the years to come. Ultimately, shares of Sonic Drive-In have the potential to appreciate in value without many of the risks associated with operating a franchise.
Tamara Rutter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.