Sonic Corporation (SONC)

[Drmicrocap]

Sonic Reports Strong Second Fiscal Quarter Results
Same-Store Sales Grow In Spite of Difficult Weather
Business Wire Sonic Corp.
March 24, 2014 4:05 PM
OKLAHOMA CITY--(BUSINESS WIRE)--

Sonic Corp. (SONC), the nation's largest chain of drive-in restaurants, today announced results for the second fiscal quarter ended February 28, 2014.

Key highlights of the company's second fiscal quarter included:

Net income per diluted share was $0.07 compared with reported net income per diluted share of $0.06 in the second fiscal quarter of 2013; excluding certain adjustments in the second fiscal quarter of 2013 as outlined below, net income per diluted share increased 40% in the second fiscal quarter of 2014;
System-wide same-store sales increased 1.4%, consisting of an increase of 1.5% at franchise drive-ins and an increase of 1.3% at company drive-ins;
Company drive-in margins improved 80 basis points; and
The company repurchased approximately $51 million of stock representing almost 5% of its stock outstanding as of the beginning of the quarter.
“We are very pleased with our second quarter results, especially in light of the difficult weather that impacted many of our markets. Our solid sales and financial performance resulted from multiple system-wide initiatives such as increased media efficiency, innovative products and layered day-part promotions. These initiatives complement our focus on service, products and pricing,” said Cliff Hudson, Chairman, Chief Executive Officer and President. “During the quarter we also began to roll out our technology initiatives, as well as signed new franchise development agreements for the development of 26 new drive-ins.

“In addition to great operating results, we used existing cash and free cash flow1 to repurchase $51 million in shares at an average price of $19.14 per share, representing nearly 5% of our outstanding shares. Since our current repurchase program began in fiscal 2012, we have repurchased more than $125 million of stock representing 17% of our outstanding shares. We have completed these repurchases while improving our balance sheet, which reflects the strength of our franchise business model.

“We will continue to focus on our multi-layered growth strategy, which incorporates same-store sales growth, leverage from higher sales, deployment of free cash flow, increasing royalty revenues and new drive-in development to build shareholder value. We believe all of these initiatives will enable us to continue to achieve double-digit earnings per share growth in the near and long term,” concluded Mr. Hudson.

Same-Store Sales

For the second fiscal quarter ended February 28, 2014, system-wide same-store sales increased 1.4%, which was comprised of a 1.5% same-store sales increase at franchise drive-ins and an increase of 1.3% at company drive-ins.

Financial Overview

For the second fiscal quarter of 2014, the company's net income totaled $4.1 million or $0.07 per diluted share, compared with net income of $3.6 million or $0.06 per diluted share in the same period in the prior year. Net income per diluted share was $0.05 for the second quarter of fiscal year 2013, excluding a $0.9 million tax benefit that included the retroactive reinstatement of the Work Opportunity Tax Credit (“WOTC”) and resolution of certain tax matters, as well as a $0.5 million ($0.3 million after-tax) charge from the write-off of debt origination costs associated with the $20.0 million early extinguishment of debt. Excluding the items outlined below, net income and net income per diluted share increased 35% and 40%, respectively.

The following non-GAAP adjustments are intended to supplement the presentation of the company's financial results in accordance with GAAP. The company believes that the presentation of these items provides useful information to investors and management regarding the underlying business trends and the performance of the company's ongoing operations and is helpful for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the financial results of the company and predicting future performance.


Three months ended Three months ended
February 28, 2014 February 28, 2013
Net Diluted Net Diluted Net Income Diluted EPS
Income EPS Income EPS $ Change % Change $ Change % Change
Reported – GAAP $ 4,107 $ 0.07 $ 3,577 $ 0.06 $ 530 15 % $ 0.01 17 %
After-tax loss from early extinguishment of debt - - 315 0.01
Retroactive tax benefit of WOTC and resolution of tax matters - - (857 ) (0.02 )
Adjusted - Non-GAAP $ 4,107 $ 0.07 $ 3,035 $ 0.05 $ 1,072 35 % $ 0.02 40 %

For the first six months of fiscal 2014, net income totaled $12.3 million or $0.21 per diluted share compared with net income of $9.7 million or $0.17 per diluted share for the same period in 2013. Excluding the items outlined below, net income and net income per diluted share increased 27% and 25%, respectively.


Six months ended Six months ended
February 28, 2014 February 28, 2013
Net Diluted Net Diluted Net Income Diluted EPS
Income EPS Income EPS $ Change % Change $ Change % Change
Reported – GAAP $ 12,315 $ 0.21 $ 9,710 $ 0.17 $ 2,605 27 % $ 0.04 24 %
Tax benefit from the IRS' acceptance of a federal tax method change (484 ) (0.01 ) - -
After-tax loss from early extinguishment of debt - - 315 0.01
Retroactive tax benefit of WOTC and resolution of tax matters - - (743 ) (0.02 )
Adjusted - Non-GAAP $ 11,831 $ 0.20 $ 9,282 $ 0.16 $ 2,549 27 % $ 0.04 25 %

Company drive-in sales for the second quarter and first six months of fiscal 2014 decreased by $1.9 million and $1.8 million, respectively, compared to the same period in the prior year primarily as a result of the closure of 12 company drive-ins during the fourth fiscal quarter of 2013 and the refranchising of seven company drive-ins during the first fiscal quarter of 2014, partially offset by an increase in same-store sales.

Development

During the second fiscal quarter, six new franchise drive-ins were opened versus three new franchise drive-in openings during the second quarter of fiscal 2013. Fiscal year-to-date, 13 new franchise drive-ins have opened versus four drive-ins in the first half of fiscal 2013.

Fiscal Year 2014 Outlook

The company expects its initiatives to drive 14% to 15% earnings per share growth in fiscal 2014 as compared to the adjusted non-GAAP earnings per share for fiscal 2013. The macroeconomic environment and its impact on consumer confidence, in addition to the pacing of capital investments, may impact results. The outlook for fiscal 2014 anticipates the following elements:

Positive same-store sales in the low single digit range for the system;
Company drive-ins expected to perform above the system average in the latter half of the fiscal year as new digital point-of-purchase technology and a new point-of-sale system are implemented;
40 to 50 new franchise drive-in openings and fewer drive-in closings than in fiscal 2013;
Drive-in-level margins improving between 50 to 100 basis points, depending upon the degree of same-store sales growth at company drive-ins and the level of commodity cost inflation over the spring and summer months;
Selling, general and administrative expenses of $68.5 million to $69.5 million;
Depreciation and amortization expense of $42 million to $42.5 million;
Net interest expense of approximately $25 million;
An income tax rate between 36% to 37% over the second half of the fiscal year;
Capital expenditures of $70 million to $75 million, which assumes the implementation of a new point-of-sale system and digital point-of-purchase technology in company drive-ins during fiscal 2014 and construction of new and relocated drive-ins;
Free cash flow of approximately $15 million to $25 million; and
The repurchase of $80 million of stock across the fiscal year utilizing existing cash on hand and free cash flow.
Earnings Conference Call

The company will host a conference call and online web simulcast this afternoon beginning at 5:00 p.m. ET. The conference call can be accessed live by dialing [phone] or [phone] for international callers. A replay will be available one hour after the call and can be accessed by dialing [phone] or [phone] for international callers; the conference ID is 6821037. The replay will be available until Monday, March 31, 2014. An online replay of the conference call will be available approximately two hours after the conclusion of the live broadcast. A link to this event may be found on the company's investor relations website at http://ir.sonicdrivein.com/.

About Sonic

SONIC®, America's Drive-In®, is the nation's largest chain of drive-in restaurants with more than 3,500 drive-ins serving approximately 3 million customers every day. Over the past 60 years, SONIC has delighted guests with signature menu items, more than 1 million drink combinations, friendly service by iconic Carhops and ongoing support of education through its award-winning Limeades for Learning® program. SONIC received top honors as America's “#1 burger quick service restaurant,” ranking in the top 5 of all brands in the 2014 Temkin Experience Ratings report. For more information about Sonic Corp. (NASDAQ/NM:SONC) and its subsidiaries, please visit sonicdrivein.com. Customers can also connect with SONIC at facebook.com/sonicdrivein or on Twitter @sonicdrive_in.

This press release contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from those expressed in, or underlying, these forward-looking statements are detailed in the company's annual and quarterly report filings with the Securities and Exchange Commission. The company undertakes no obligation to publicly release revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the Securities and Exchange Commission.

The tables that follow provide information regarding the number of company drive-ins, franchise drive-ins and system drive-ins in operation as of the end of the periods indicated. In addition, these tables provide information regarding franchise sales, system growth in sales, and both franchise and system average drive-in sales and change in same-store sales. System information includes both company and franchise drive-in information, which we believe is useful in analyzing the growth of our brand. While we do not record franchise drive-in sales as revenues, we believe this information is important in understanding our financial performance since we calculate and record franchise royalties based on a percentage of franchise sales. This information also is indicative of the financial health of our franchisees.

1 Free cash flow is defined as net income plus depreciation, amortization and stock compensation expenses, less capital expenditures.

SONC-F


SONIC CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

Three months ended Six months ended
February 28, February 28,
2014 2013 2014 2013
Revenues:
Company Drive-In sales $ 81,848 $ 83,706 $ 175,347 $ 177,162
Franchise Drive-Ins:
Franchise royalties and fees 26,582 25,996 57,803 55,916
Lease revenue 715 949 1,601 2,435
Other 596 490 1,642 1,636
Total revenues 109,741 111,141 236,393 237,149

Costs and expenses:
Company Drive-Ins:
Food and packaging 23,043 23,546 49,279 50,178
Payroll and other employee benefits 30,031 31,448 63,371 64,913
Other operating expenses, exclusive of
depreciation and amortization included below 18,437 18,811 40,244 40,787
Total cost of Company Drive-In sales 71,511 73,805 152,894 155,878

Selling, general and administrative 15,886 15,467 32,891 31,597
Depreciation and amortization 10,031 10,069 20,065 20,664
Other operating income, net (36 ) (218 ) (165 ) (211 )
Total costs and expenses 97,392 99,123 205,685 207,928
Income from operations 12,349 12,018 30,708 29,221

Interest expense 6,384 7,448 12,767 15,123
Interest income (144 ) (168 ) (261 ) (309 )
Loss from early extinguishment of debt - 492 - 492
Net interest expense 6,240 7,772 12,506 15,306
Income before income taxes 6,109 4,246 18,202 13,915
Provision for income taxes 2,002 669 5,887 4,205
Net income $ 4,107 $ 3,577 $ 12,315 $ 9,710

Basic income per share $ 0.07 $ 0.06 $ 0.22 $ 0.17
Diluted income per share $ 0.07 $ 0.06 $ 0.21 $ 0.17

Weighted average basic shares 55,958 55,798 56,125 56,735
Weighted average diluted shares 57,408 56,423 57,653 57,254


SONIC CORP.
Unaudited Supplemental Information

Three months ended Six months ended
February 28, February 28,
2014 2013 2014 2013
Drive-Ins in Operation
Company:
Total at beginning of period 388 409 396 409
Opened - - - -
Sold to franchisees - - (7 ) -
Closed (net of re-openings) - (4 ) (1 ) (4 )
Total at end of period 388 405 388 405
Franchise:
Total at beginning of period 3,129 3,140 3,126 3,147
Opened 6 3 13 4
Acquired from the company - - 7 -
Closed (net of re-openings) (16 ) (22 ) (27 ) (30 )
Total at end of period 3,119 3,121 3,119 3,121
System-wide:
Total at beginning of period 3,517 3,549 3,522 3,556
Opened 6 3 13 4
Closed (net of re-openings) (16 ) (26 ) (28 ) (34 )
Total at end of period 3,507 3,526 3,507 3,526

Three months ended Six months ended
February 28, February 28,
2014 2013 2014 2013
($ in thousands) ($ in thousands)
Sales Analysis
Company Drive-Ins:
Total sales $ 81,848 $ 83,706 $ 175,347 $ 177,162
Average drive-in sales 213 207 452 437
Change in same-store sales 1.3 % 1.9 % 1.6 % 3.1 %
Franchised Drive-Ins:
Total sales $ 725,270 $ 712,934 $ 1,559,540 $ 1,527,736
Average drive-in sales 235 232 502 494
Change in same-store sales 1.5 % (0.3 ) % 1.8 % 1.3 %
System-wide:
Change in total sales 0.8 % (0.5 ) % 1.5 % 1.6 %
Average drive-in sales $ 234 $ 229 $ 499 $ 487
Change in same-store sales 1.4 % - % 1.8 % 1.5 %

Note: Change in same-store sales based on restaurants open for a minimum of 15 months.


SONIC CORP.
Unaudited Supplemental Information

Three months ended Six months ended
February 28, February 28,
2014 2013 2014 2013
Revenues (in thousands)
Company Drive-In sales $ 81,848 $ 83,706 $ 175,347 $ 177,162
Franchise Drive-Ins:
Franchise royalties 26,376 25,821 57,288 55,736
Franchise fees 206 175 515 180
Lease revenue 715 949 1,601 2,435
Other 596 490 1,642 1,636
Total revenues $ 109,741 $ 111,141 $ 236,393 $ 237,149

Three months ended Six months ended
February 28, February 28,
2014 2013 2014 2013
Margin Analysis (percentage of Company Drive-In sales)
Company Drive-Ins:
Food and packaging 28.2 % 28.1 % 28.1 % 28.3 %
Payroll and employee benefits 36.7 37.6 36.1 36.6
Other operating expenses 22.5 22.5 23.0 23.1
Cost of Company Drive-In sales 87.4 % 88.2 % 87.2 % 88.0 %

February 28, August 31,
2014 2013
Selected Balance Sheet Data (In thousands)
Cash and cash equivalents $ 35,117 $ 77,896
Current assets 87,784 140,722
Property, equipment and capital leases, net 415,334 399,661
Total assets $ 618,623 $ 660,794

Current liabilities, including capital lease obligations and
long-term debt due within one year $ 61,105 $ 72,930
Obligations under capital leases due after one year 25,020 22,458
Long-term debt due after one year 432,485 437,380
Total liabilities 572,353 583,330
Stockholders' equity $ 46,270 $ 77,464


Contact:
Claudia San Pedro
Vice President of Investor Relations, Communications and Treasurer
405-225-4846