Sonic Reports Third Quarter 2010 Results

OKLAHOMA CITY, Jun 21, 2010 (BUSINESS WIRE) -- Sonic Corp. (NASDAQ: SONC), the nation's largest chain of drive-in restaurants, today announced results for the third fiscal quarter ended May 31, 2010. Key aspects of the company's third quarter report included:

  • Net income per diluted share totaled $0.18 versus net income per diluted share of $0.27 in the year-earlier quarter;
  • System-wide same-store sales declined 6.0% during the third quarter; same-store sales at partner drive-ins declined 6.3% in the quarter;
  • Franchise drive-in openings totaled 18 for the quarter versus 32 in the same period last year; and
  • Sonic completed the purchase of $58 million of its class A-2 senior fixed-rate notes using excess cash.

"Sales continued to be challenged in the third quarter," said Clifford Hudson, Chairman and Chief Executive Officer. "In this fourth quarter and beyond, we are committed to managing our business with initiatives that are aligned with our core brand strengths and are relevant to the consumer. We believe these steps, which include a new value promotion strategy, new messaging, a targeted media allocation strategy and, most recently, a product quality initiative, will result in improvements in performance.

"From a capital management perspective, we were very pleased to have purchased $58 million in debt in the third quarter," Hudson continued. "These purchases, combined with $50 million in principal payments in fiscal 2010, strengthen our balance sheet and reduce interest expense."

Income Statement Overview

For the third quarter ended May 31, 2010, revenues declined 19% to $145.9 million from $181.1 million in the year-earlier period, reflecting a change in the company's revenue mix from refranchising 205 partner drive-ins during fiscal 2009, declining same-store sales at partner drive-ins, and reduced royalty revenue due to the sales declines at franchised restaurants. Net income for the quarter was $11.0 million or $0.18 per diluted share versus $16.8 million or $0.27 per diluted share in the same quarter last year. Special items include:

  • A $0.03 tax benefit from the stock option exchange program completed in the third quarter of fiscal 2010; and
  • Gains of $0.11 per diluted share on the sale of partner drive-ins in the year-earlier quarter, partially offset by impairment charges totaling $0.08 per diluted share.

Excluding special items, net income for the third quarter in fiscal 2010 was $9.2 million or $0.15 per diluted share compared with $14.7 million or $0.24 per diluted share for the prior-year period.

For the first nine months of the fiscal year, revenues declined 26% to $395.8 million from $534.0 million in the prior year. Net income on a year-to-date basis was $16.6 million or $0.27 per diluted share. Net income in the same period last year was $32.6 million or $0.53 per diluted share. Special items include:

  • A $0.03 tax benefit from the stock option exchange program completed in the third quarter of fiscal 2010; and
  • Gains of $0.11 per diluted share on the sale of partner drive-ins, a gain on debt extinguishment of $0.06 per diluted share, and partially offsetting impairment charges totaling $0.08 per diluted share in the year-earlier period
.

Excluding special items, net income for the first nine months of fiscal 2010 was $14.8 million or $0.24 per diluted share compared with $26.7 million or $0.44 per diluted share for the prior-year period.

Same-Store Sales

For the third fiscal quarter ended May 31, 2010, system-wide same-store sales declined 6.0% versus a decrease of 5.4% for the same quarter last year and reflected 6.0% lower same-store sales at franchise drive-ins and a 6.3% decline at partner drive-ins. For the first nine months of fiscal 2010, system-wide same-store sales declined 8.3% versus a decrease of 4.3% in the prior-year period. The decline in system-wide same-store sales for the first nine months of fiscal 2010 reflected 8.1% lower same-store sales at franchise drive-ins and a 9.9% decline at partner drive-ins.

Development

System-wide drive-in openings totaled 19 in the third quarter, including 18 franchise drive-ins, versus 34 new system-wide drive-in openings during the third quarter of fiscal 2009, including 32 by franchisees. For the first nine months of fiscal 2010, system-wide drive-in openings totaled 61, including 57 franchise drive-ins, versus 100 in the year-earlier period, including 90 franchise drive-ins. Sonic currently expects that new franchise drive-in openings will total 80 to 85 for the full fiscal year.

Concluding Comments

"We believe the best path toward improved sales performance is to focus on implementation of our key strategic initiatives, which will further position us as a differentiated and quality quick-service restaurant," Hudson said. "The state of the economic recovery and ongoing consumer pressures will continue to be a challenge for us in the near term. At the same time, we believe that providing consumers a unique and fun experience, combined with a strong focus on customer service, high quality and distinctive products, will prove to be a winning formula for continued growth."

Fiscal 2010 Revised Outlook

Based on Sonic's third quarter results and the anticipation of a continued challenging economic and credit market environment, management anticipates earnings for 2010 will total between $0.50 to $0.55 per diluted share compared with earnings of $0.72 per diluted share for fiscal 2009, excluding gains and provisions for impairment. This outlook is based primarily on the following:

  • A system-wide same-store sales decline of 4% to 8% for the fourth quarter;
  • New franchise drive-in openings of 80 to 85 for the year;
  • Unfavorable restaurant-level margins for the fourth quarter of approximately 150 to 250 basis points as a result of de-leveraging and higher-than-expected beef costs; this estimate is based upon non-controlling interests being included in restaurant-level margins on a pro forma basis;
  • Depreciation and amortization of $42 to $43 million for the year;
  • A $6.5 to $7 million decline in interest expense reflecting lower debt levels for the year;
  • An income tax rate between 37.5% and 38.5% for the fourth quarter; and
  • Capital expenditures for the year ranging from $25 to $30 million.

About Sonic

Sonic, America's Drive-In, originally started as a hamburger and root beer stand in 1953 in Shawnee, Okla., called Top Hat Drive-In, and then changed its name to Sonic in 1959. The first drive-in to adopt the Sonic name is still serving customers in Stillwater, Okla. Sonic has more than 3,500 drive-ins coast to coast, where approximately three million customers eat every day.

A listen-only simulcast of Sonic's third quarter conference call will begin today at approximately 4:00 p.m. Central Time and can be accessed at the company's web site. An on-demand replay, using the same link, will be available at approximately 7:00 p.m. Central Time today and will continue until July 21, 2010.

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 partner 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 partner 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.


SONIC CORP.
                                         Unaudited Supplemental Information
                                      (In thousands, except per share amounts)
                                                         Third Quarter Ended                Nine Months Ended
                                                               May 31,                           May 31,
                                                  --------------------------        --------------------------
                                                        2010             2009             2010             2009
                                                  ---------------- ---------------- ---------------- ----------------
Statement of Operations
Revenues:
 Partner Drive-In sales                             $ 108,752        $ 144,279        $ 298,963        $ 439,034
 Franchise Drive-Ins:
   Franchise royalties                                 32,807           33,399           86,621           88,830
   Franchise fees                                         854            1,350            1,936            3,372
 Other                                                  3,509            2,029            8,306            2,813
                                                      -------          -------          -------          -------
                                                      145,922          181,057          395,826          534,049
Costs and expenses:
 Partner Drive-Ins:
   Food and packaging                                  30,031           39,457           82,393          121,113
   Payroll and other employee benefits                 37,991           45,204          102,467          142,530
   Other operating expenses                            25,256           30,365           72,214           96,913
                                                      -------          -------          -------          -------
                                                       93,278          115,026          257,074          360,556
Selling, general and administrative                    17,096           16,420           50,552           48,882
Depreciation and amortization                          10,645           11,454           31,958           37,002
Provision for impairment of long-lived assets             188            7,489              188            7,903
                                                      -------          -------          -------          -------
                                                      121,207          150,389          339,772          454,343
                                                      -------          -------          -------          -------
Other operating income
 Gains (losses) on sale of Partner Drive-Ins              (61 )         10,846             (677 )         10,917
                                                      ------- ---      -------          ------- ---      -------
                                                          (61 )         10,846             (677 )         10,917
                                                      ------- ---      -------          ------- ---      -------
Income from operations                                 24,654           41,514           55,377           90,623
Interest expense                                        9,036           10,311           28,426           33,439
(Gain) loss from early extinguishment of debt             314               --              314           (6,382 )
Interest income                                          (251 )           (400 )           (744 )         (1,084 )
                                                      ------- ---      ------- ---      ------- ---      ------- ---
Net interest expense                                    9,099            9,911           27,996           25,973
                                                      -------          -------          -------          -------
Income before income taxes                             15,555           31,603           27,381           64,650
Provision for income taxes                              3,450           10,049            6,538           20,426
                                                      -------          -------          -------          -------
Net income - including noncontrolling interest         12,105           21,554           20,843           44,224
Net income - noncontrolling interest                    1,139            4,781            4,289           11,670
                                                      -------          -------          -------          -------
Net income - attributable to Sonic Corp.            $  10,966        $  16,773        $  16,554        $  32,554
                                                  === =======      === =======      === =======      === =======
Net income per share attributable to Sonic Corp:
 Basic                                              $    0.18        $    0.28        $    0.27        $    0.54
                                                  === =======      === =======      === =======      === =======
 Diluted                                            $    0.18        $    0.27        $    0.27        $    0.53
                                                  === =======      === =======      === =======      === =======
Weighted average shares used in calculation:
 Basic                                                 61,434           60,886           61,215           60,664
                                                      =======          =======          =======          =======
 Diluted                                               61,697           61,215           61,532           61,191
                                                      =======          =======          =======          =======
I
n accordance with Accounting Standards Codification (ASC) Topic
810, "Consolidation," net income (after tax) attributable to
noncontrolling interest, previously referred to as Minority
Interest in Earnings of Partner Drive-Ins and reported on a
pre-tax basis under Costs and Expenses-Partner Drive-Ins, is now
reported separately from the net income of the controlling
interest also on a pre-tax basis. The change in presentation has
no effect on the company's reported net income.
                                      SONIC CORP.
                          Unaudited Supplemental Information
                                          Third Quarter Ended      Nine Months Ended
                                                May 31,                 May 31,
                                        ------------------      ------------------
                                           2010        2009        2010        2009
                                        ----------- ----------- ----------- -----------
Drive-Ins in Operation:
 Partner:
   Total at beginning of period           457         669         475         684
   Opened                                   1           2           4          10
   Acquired from (sold to) franchisees     --        (177 )       (16 )      (194 )
   Closed                                  --          (2 )        (5 )        (8 )
                                        -----       ----- ----  ----- ----  ----- ----
   Total at end of period                 458         492         458         492
                                        -----       -----       -----       -----
 Franchise:
   Total at beginning of period         3,103       2,842       3,069       2,791
   Opened                                  18          32          57          90
   Acquired from (sold to) company         --         177          16         194
   Closed (net of reopening)               (9 )       (17 )       (30 )       (41 )
                                        ----- ----  ----- ----  ----- ----  ----- ----
   Total at end of period               3,112       3,034       3,112       3,034
                                        -----       -----       -----       -----
 System-wide:
   Total at beginning of period         3,560       3,511       3,544       3,475
   Opened                                  19          34          61         100
   Closed (net of reopening)               (9 )       (19 )       (35 )       (49 )
                                        ----- ----  ----- ----  ----- ----  ----- ----
   Total at end of period               3,570       3,526       3,570       3,526
                                        =====       =====       =====       =====
N
ote: Partner Drive-Ins are those Sonic Drive-Ins in which the
company owns a majority interest, typically at least 60%.
                                              SONIC CORP.
                                  Unaudited Supplemental Information
                                           ($ in thousands)
                                      Third Quarter Ended                  Nine Months Ended
                                            May 31,                             May 31,
                               --------------------------        ------------------------------
                                     2010             2009              2010               2009
                               ---------------- ---------------- ------------------ ------------------
Sales Analysis
 Partner Drive-Ins:
   Total sales                   $ 108,752        $ 144,279        $   298,963        $   439,034
   Average drive-in sales              238              249                642                689
   Change in same-store sales         -6.3 %           -7.7 %             -9.9 %             -6.8 %
 Franchise Drive-Ins:
   Total sales                   $ 854,109        $ 861,645        $ 2,288,545        $ 2,312,731
   Average drive-in sales              279              295                749                811
   Change in same-store sales         -6.0 %           -4.9 %             -8.1 %             -3.7 %
 System-wide:
   Change in total sales              -4.3 %           -0.9 %             -6.0 %              0.6 %
   Average drive-in sales        $     272        $     287        $       733        $       789
   Change in same-store sales         -6.0 %           -5.4 %             -8.3 %             -4.3 %
N
ote: Change in same-store sales based on drive-ins open for at
least 15 months.
                                                      SONIC CORP.
                                          Unaudited Supplemental Information
                                                   ($ in thousands)
                                                                   Third Quarter Ended         Nine Months Ended
                                                                         May 31,                    May 31,
                                                                 ------------------      ----------------------
                                                                    2010        2009          2010           2009
                                                                 ----------- ----------- -------------- --------------
Margin Analysis
(percentage of Partner Drive-In sales)
 Partner Drive-Ins:
   Food and packaging                                                27.6 %      27.3 %        27.6 %         27.6 %
   Payroll and employee benefits                                     34.9 %      31.3 %        34.3 %         32.5 %
   Other operating expenses                                          23.2 %      21.0 %        24.2 %         22.1 %
                                                                 -------- -  -------- -     ------- --     ------- --
     Cost of sales, as reported                                      85.7 %      79.6 %        86.1 %         82.2 %
   Noncontrolling interest                                            1.0 %       3.3 %         1.4 %          2.7 %
                                                                 -------- -  -------- -     ------- --     ------- --
     Pro forma cost of sales, including noncontrolling interest      86.7 %      82.9 %        87.5 %         84.9 %
                                                                                             May 31,       Aug. 31,
                                                                                              2010           2009
                                                                                         -----------    -----------
Balance Sheet Data
Current assets                                                                            $ 124,787      $ 202,132
Property, equipment and capital leases, net                                                 510,864        523,938
Total assets                                                                                749,818        849,041
Current liabilities, including capital lease obligations and                                111,149        117,319
long-term debt due within one year
Obligations under capital leases due after one year                                          33,651         36,516
Long-term debt due after one year                                                           549,985        646,851
Total liabilities                                                                           733,766        851,393
Stockholders' equity (deficit)                                                               16,052         (2,352 )
SOURCE: Sonic Corp.

###

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