On a one-year basis, shares of fast-food restaurant Sonic Corp. (SONC) are up nearly 12% versus the greater market's flat return. The vast majority of that gain was in the past month alone, as the company beat analyst top- and bottom-line expectations. Versus consensus expectations of $127.7 million and adjusted EPS $0.18, Sonic reported $133.16 million and $0.16, respectively.
However, the highlight that attracted the most attention was Sonic's systemwide same-restaurant sales growth of 6.5% during the quarter. Additionally, the company revised its adjusted EPS growth for fiscal 2016 from 20% to 25%. Can Sonic continue to grow same-store sales and earnings at the rapid clip?
Sonic's same-store growth is enviable; restaurant openings are not
Sonic investors should be satisfied with the company's second-fiscal-quarter same-restaurant-sales growth figure of 6.5%, but this figure is down 500 basis points from the mind-boggling 11.5% the company achieved in last year's corresponding quarter. It's important for Sonic to continue to post solid same-restaurant-sales growth moving forward, because the company's level of new restaurant creation will be unlikely to support a high level of growth. In the absence of new units, the company will need to grow its top line through a combination of franchising revenues and company-owned sales.
For the three months ended Feb. 28, 2014, Sonic had 3,507 systemwide restaurants, and two years later the company has 3,528 stores, good for annualized store growth of 0.3%. The company decreased its company-owned stores from 388 to 375 in this period, but franchised stores offset the decline. Sonic has plans to open 55 new stores at the midpoint in 2016, but even that figure only amounts to a store-count growth of 1.6%.
While I'd like to see more store openings for a company with this level of same-store-sales growth, I'm somewhat placated by the number of store commitments over the past two years -- 51 and 107, respectively. While it hasn't shown up in store count totals, Sonic appears to have a strong pipeline of restaurants on tap. Consumers appear to be buying into Sonic's value proposition, opening new restaurants to take advantage of demand is good business.
A crowded burger space
The burger space is quickly becoming crowded. Last year's successful IPO of Shake Shack (SHAK -0.27%), a resurgent McDonald's, and even Chipotle Mexican Grill's initial steps to enter the concept are just a few examples of increased competition. In the short run, however, it's unlikely the competitive landscape will change. Shake Shack has plans to open approximately 20 restaurants this year, not enough to steal tremendous market share. Chipotle, which appears to be in the planning phase, will take years to become a serious competitor -- if ever.
As the largest burger chain, McDonald's is the biggest competitor to Sonic, and investors should watch its moves carefully. McDonald's has experienced a mini-renaissance under new CEO Steve Easterbrook and positive press in regard to its all-day breakfast and McPick 2 promotion. However, Sonic has continued to execute during this period and will most likely continue to do so. Investors with an eye for small-cap stocks should watch Sonic's moves closely.