Sonic Fiscal 2017 Earnings Per Share Increase 12%
Sonic Corp. (NASDAQ: SONC) yesterday announced results for its fourth fiscal quarter ended August 31, 2017.
Key highlights of the company’s fourth quarter of fiscal year 2017 included:
- Net income per diluted share decreased 6% to $0.50 versus $0.53 in the prior-year period; adjusted net income per diluted share remained the same as the prior-year period at $0.45;
- System same-store sales declined 3.3%, consisting of a 3.2% same-store sales decrease at franchise drive-ins and a 4.8% decrease at company drive-ins;
- Company drive-in margins increased by 230 basis points;
- 27 new drive-ins opened; and
- The company repurchased 1.8 million outstanding shares.
Key highlights of the company’s fiscal year 2017 included:
- Net income per diluted share increased 12% to $1.45 compared with $1.29 in the prior year; adjusted net income per diluted share decreased 3% to $1.25 compared with adjusted net income per diluted share of $1.29 in the prior year;
- System same-store sales declined 3.3%, consisting of a 3.2% same-store sales decrease at franchise drive-ins and a decrease of 4.7% at company drive-ins;
- Company drive-in margins contracted by 60 basis points;
- 66 new drive-ins opened; and
- The company purchased more than 6.7 million shares of its common stock, representing approximately 13.5% of outstanding shares for the fiscal year.
“Our weaker-than-expected same-store sales performance reflects the intense competitive environment and unfavorable weather we saw during the quarter, including the devastation caused by Hurricane Harvey,” said Cliff Hudson, Sonic Corp. CEO. “In addition, our movie-linked, softer promotional line-up in June and July did not match the traffic that was driven by product bundling in the summer of 2016. As we shifted to more aggressive, brand-centric promotions in late summer, we saw traffic and sales declines moderate.
“With a new marketing leadership team now in place, we continue to evolve the way we target, market to and engage with our most loyal drive-in customers. This includes the refinement of current media strategies to achieve a ten percent increase in reach as well as a complementary revision to our creative content. Despite additional weather disruption to start our first fiscal quarter, we continue to target positive same-store sales in fiscal 2018.
“Although sales were slower than we would have liked, we accomplished much in fiscal 2017, including the expansion of our new-store development pipeline with new and existing franchisee groups, the release of our fully integrated and redesigned mobile app and the testing of order ahead functionality. In addition, we repurchased over 6.7 million Sonic Corp. shares in fiscal 2017, or 13.5% of shares outstanding, while paying out over $24 million in dividends. We have fully transitioned to a more highly franchised business model and look forward to driving increased cash flow over the next several years.”
Financial Overview
For the fourth fiscal quarter of 2017, the company’s net income totaled $20.8 million or $0.50 per diluted share compared to net income of $25.4 million or $0.53 per diluted share in the same period of the prior year. Excluding the items outlined below, net income decreased 13% and net income per diluted share was flat.
The following analysis of non-GAAP adjustments is intended to supplement the presentation of the company’s financial results in accordance with GAAP. The company believes that the presentation of this analysis 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.
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(In thousands, except per share amounts) |
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| Three months ended | Three months ended | |||||||||||||||||||||||||||||
| August 31, 2017 | August 31, 2016 | |||||||||||||||||||||||||||||
| Net | Diluted | Net | Diluted | Net Income | Diluted EPS | |||||||||||||||||||||||||
| Income | EPS | Income | EPS | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||
| Reported – GAAP | $ | 20,831 | $ | 0.50 | $ | 25,437 | $ | 0.53 | $ | (4,606 | ) | (18 | )% | $ | (0.03 | ) | (6 | )% | ||||||||||||
| Net gain on refranchising transactions (1) | (113 | ) | 0.00 | (972 | ) | (0.02 | ) | |||||||||||||||||||||||
| Tax impact on refranchising transactions (2) | 41 | 0.00 | 317 | 0.00 | ||||||||||||||||||||||||||
| Restructuring charges (3) | 1,819 | 0.04 | — | — | ||||||||||||||||||||||||||
| Tax impact of restructuring charges (2) | (672 | ) | (0.02 | ) | — | — | ||||||||||||||||||||||||
| Gain on sale of real estate | (4,702 | ) | (0.11 | ) | — | — | ||||||||||||||||||||||||
| Tax impact on real estate sale (2) | 1,738 | 0.04 | — | — | ||||||||||||||||||||||||||
| FIN 48 release of income tax credits and deductions | — | — | (3,038 | ) | (0.06 | ) | ||||||||||||||||||||||||
| Adjusted – Non-GAAP | $ | 18,942 | $ | 0.45 | $ | 21,744 | $ | 0.45 | $ | (2,802 | ) | (13 | )% | $ | — | — |
% |
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For fiscal year 2017, net income totaled $63.7 million or $1.45 per diluted share compared with net income of $64.1 million or $1.29 per diluted share for the same period in 2016. Excluding the items outlined below, net income and net income per diluted share decreased 14% and 3%, respectively.
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(In thousands, except per share amounts) |
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| Fiscal year ended August 31, 2017 |
Fiscal year ended August 31, 2016 |
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| Net | Diluted | Net | Diluted | Net Income | Diluted EPS | |||||||||||||||||||||||||
| Income | EPS | Income | EPS | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||
| Reported – GAAP | $ | 63,663 | $ | 1.45 | $ | 64,067 | $ | 1.29 | $ | (404) | (1) | % | $ | 0.16 | 12 | % | ||||||||||||||
| Net gain on refranchising transactions (1) | (6,758 | ) | (0.15 | ) | (972 | ) | (0.02 | ) | ||||||||||||||||||||||
| Tax impact on refranchising transactions (2) | 2,542 | 0.06 | 317 | 0.00 | ||||||||||||||||||||||||||
| Gain on sale of investment in refranchised drive-in operations (3) | (3,795 | ) | (0.09 | ) | — | — | ||||||||||||||||||||||||
| Tax impact on sale of investment in refranchised drive-in operations (4) | 1,350 | 0.03 | — | — | ||||||||||||||||||||||||||
| Restructuring charges (5) | 1,819 | 0.04 | — | — | ||||||||||||||||||||||||||
| Tax impact of restructuring charges (6) | (672 | ) | (0.02 | ) | — | — | ||||||||||||||||||||||||
| Gain on sale of real estate | (4,702 | ) | (0.11 | ) | (1,875 | ) | (0.04 | ) | ||||||||||||||||||||||
| Tax impact on real estate sale (7) | 1,738 | 0.04 | 664 | 0.01 | ||||||||||||||||||||||||||
| FIN 48 release of income tax credits and deductions | — | — | (3,038 | ) | (0.06 | ) | ||||||||||||||||||||||||
| Loss from early extinguishment of debt | — | — | 8,750 | 0.18 | ||||||||||||||||||||||||||
| Tax impact on debt extinguishment (8) | — | — | (3,027 | ) | (0.06 | ) | ||||||||||||||||||||||||
| Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters | — | — | (585 | ) | (0.01 | ) | ||||||||||||||||||||||||
| Adjusted – Non-GAAP | $ | 55,185 | $ | 1.25 | $ | 64,301 | $ | 1.29 | $ | (9,116 | ) | (14 | )% | $ | (0.04 | ) | (3 | )% | ||||||||||||
| ________________ | ||
| (1) | During the first quarter of fiscal year 2017, we completed two transactions to refranchise the operations of 56 company drive-ins. Of the proceeds, $3.8 million was applied as the initial lease payment for an option to purchase the real estate within 24 months. The franchisee exercised the option in the last six months of the fiscal year. Until the option was fully exercised, the franchisee made monthly lease payments which totaled $0.8 million for the fiscal year-to-date, net of sub-lease expense. During the second quarter of fiscal year 2017, we completed transactions to refranchise the operations of 54 company drive-ins, one of which resulted in a gain of $7.8 million and another in a loss of $1.4 million. The loss transaction reflects a deferred gain of $0.8 million as a result of a real estate purchase option extended to the franchisee. The deferred gain is being amortized into income through January 2020 when the option becomes exercisable. | |
| (2) | Combined tax impact at an effective tax rate of 35.6% during the first quarter of fiscal year 2017 and at adjusted effective tax rates of 36.0%, 48.7% and 37.0% during the second, third and fourth quarters of fiscal year 2017, respectively; tax impact during fiscal year 2016 at an adjusted effective tax rate of 32.6%. | |
| (3) | Gain on sale of investment in refranchised drive-in operations is related to minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009. Income from minority investments is included in other revenue on the consolidated statements of income. | |
| (4) | Tax impact during the period at an effective tax rate of 35.6%. | |
| (5) |
During the fourth quarter of fiscal year 2017 the company incurred severance costs related to the elimination of certain corporate positions. |
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| (6) | Tax impact during the period at an adjusted effective tax rate of 37.0%. | |
| (7) | Tax impact during fiscal year 2017 at an adjusted effective tax rate of 37.0%; tax impact during fiscal year 2016 at an adjusted effective tax rate of 35.4%. | |
| (8) | Tax impact during the period at an effective tax rate of 34.6%. | |
Fiscal Year 2018 Outlook
While the macroeconomic environment may impact results, the company continues to expect adjusted earnings per share for fiscal year 2018 to increase 5% to 10% year over year. The outlook for fiscal 2018 anticipates the following elements:
- Approximately 0% to 2% same-store sales growth for the system;
- Royalty revenue growth from new unit development;
- 70 to 80 new franchise drive-in openings;
- Drive-in-level margins of 15.1% to 15.7%, depending upon the degree of same-store sales growth at company drive-ins;
- Selling, general and administrative expenses of approximately $76 million to $78 million;
- Depreciation and amortization expense of $40 million to $42 million;
- Net interest expense of approximately $32 million to $34 million;
- Capital expenditures of $38 million to $40 million; excluding spending on build-to-suit drive-in development, capital outlays would be $34 million to $36 million;
- Free cash flow(1) of approximately $60 million to $65 million;
- An income tax rate of approximately 35.0%;
- The repurchase of approximately $160 million in shares across the fiscal year; and
- An expected quarterly cash dividend of $0.16 per share.
Update on Investigation into Payment Card Breach
On September 18, 2017, the company was informed by its payment card processor that there appeared to be suspicious activity involving credit and debit cards used at certain Sonic Drive-In locations. Upon learning of the suspicious activity, the company immediately contacted and began working with law enforcement to investigate the matter. At the same time, the company immediately launched its own investigation with the help of experienced third-party forensics firms. On October 4, 2017, from its investigations to date, the company issued a public statement notifying guests and the public that it had discovered that credit and debit card numbers may have been acquired without authorization as part of a malware attack experienced at certain Sonic Drive-In locations. As a precautionary measure, the company offered 24 months of free fraud detection and identity theft protection through Experian’s IdentityWorks program to guests who used their cards at Sonic Drive-In locations this year. The company’s investigation is ongoing, and the company continues to work closely with experienced forensics firms and law enforcement officials to further investigate the matter.
About Sonic
SONIC, America’s Drive-In is the nation’s largest drive-in restaurant chain serving approximately 3 million customers every day. Nearly 94 percent of SONIC’s 3,500 drive-in locations are owned and operated by local business men and women. For 64 years, SONIC has delighted guests with signature menu items, 1.3 million drink combinations and friendly service by iconic Carhops. Since the 2009 launch of SONIC’s Limeades for Learning philanthropic campaign in partnership with DonorsChoose.org, SONIC has donated $8.5 million to public school teachers nationwide to fund essential learning materials and innovative teaching resources to inspire creativity and learning in their students
| SONIC CORP. | ||||||||||||||||
| UNAUDITED CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| ? | ||||||||||||||||
| Three months ended August 31, |
Fiscal year ended August 31, |
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| ? | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Revenues: | ||||||||||||||||
| Company Drive-In sales | $ | 72,601 | $ | 111,456 | $ | 296,101 | $ | 425,795 | ||||||||
| Franchise Drive-Ins: | ||||||||||||||||
| Franchise royalties and fees | 47,840 | 47,663 | 170,527 | 170,319 | ||||||||||||
| Lease revenue | 1,962 | 2,327 | 7,436 | 7,459 | ||||||||||||
| Other | 1,165 | 672 | 3,203 | 2,747 | ||||||||||||
| Total revenues | 123,568 | 162,118 | 477,267 | 606,320 | ||||||||||||
| ? | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Company Drive-Ins: | ||||||||||||||||
| Food and packaging | 19,859 | 30,888 | 80,971 | 118,136 | ||||||||||||
| Payroll and other employee benefits | 24,789 | 38,625 | 107,477 | 150,260 | ||||||||||||
| Other operating expenses, exclusive of depreciation and amortization included below | 13,923 | 22,974 | 61,463 | 88,424 | ||||||||||||
| Total cost of Company Drive-In sales | 58,571 | 92,487 | 249,911 | 356,820 | ||||||||||||
| ? | ||||||||||||||||
| Selling, general and administrative | 19,874 | 19,748 | 78,687 | 82,089 | ||||||||||||
| Depreciation and amortization | 9,717 | 10,956 | 39,248 | 44,418 | ||||||||||||
| Provision for impairment of long-lived assets | 148 | 155 | 1,140 | 232 | ||||||||||||
| Other operating income, net | (2,897 | ) | (1,543 | ) | (14,994 | ) | (4,691 | ) | ||||||||
| Total costs and expenses | 85,413 | 121,803 | 353,992 | 478,868 | ||||||||||||
| Income from operations | 38,155 | 40,315 | 123,275 | 127,452 | ||||||||||||
| ? | ||||||||||||||||
| Interest expense | 7,472 | 7,249 | 29,206 | 26,714 | ||||||||||||
| Interest income | (351 | ) | (190 | ) | (1,398 | ) | (516 | ) | ||||||||
| Debt extinguishment costs | — | — | — | 8,750 | ||||||||||||
| Net interest expense | 7,121 | 7,059 | 27,808 | 34,948 | ||||||||||||
| Income before income taxes | 31,034 | 33,256 | 95,467 | 92,504 | ||||||||||||
| Provision for income taxes | 10,203 | 7,819 | 31,804 | 28,437 | ||||||||||||
| Net income | $ | 20,831 | $ | 25,437 | $ | 63,663 | $ | 64,067 | ||||||||
| ? | ||||||||||||||||
| Basic income per share | $ | 0.50 | $ | 0.54 | $ | 1.47 | $ | 1.32 | ||||||||
| Diluted income per share | $ | 0.50 | $ | 0.53 | $ | 1.45 | $ | 1.29 | ||||||||
| ? | ||||||||||||||||
| Weighted average basic shares | 41,309 | 47,237 | 43,306 | 48,703 | ||||||||||||
| Weighted average diluted shares | 41,985 | 48,037 | 44,043 | 49,669 | ||||||||||||
| SONIC CORP. | ||||||||||||||||||||
| Unaudited Supplemental Information | ||||||||||||||||||||
| ? | ||||||||||||||||||||
| Three months ended August 31, |
Fiscal year ended August 31, |
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| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||
| Drive-Ins in Operation: | ||||||||||||||||||||
| Company: | ||||||||||||||||||||
| Total at beginning of period | 230 | 375 | 345 | 387 | ||||||||||||||||
| Opened | — | 1 | 3 | 1 | ||||||||||||||||
| Sold to franchisees | (2 | ) | (29 | ) | (117 | ) | (38 | ) | ||||||||||||
| Closed (net of re-openings) | — | (2 | ) | (3 | ) | (5 | ) | |||||||||||||
| Total at end of period | 228 | 345 | 228 | 345 | ||||||||||||||||
| Franchise: | ||||||||||||||||||||
| Total at beginning of period | 3,341 | 3,168 | 3,212 | 3,139 | ||||||||||||||||
| Opened | 27 | 18 | 63 | 52 | ||||||||||||||||
| Acquired from the company | 2 | 29 | 117 | 38 | ||||||||||||||||
| Closed (net of re-openings) | (5 | ) | (3 | ) | (27 | ) | (17 | ) | ||||||||||||
| Total at end of period | 3,365 | 3,212 | 3,365 | 3,212 | ||||||||||||||||
| System: | ||||||||||||||||||||
| Total at beginning of period | 3,571 | 3,543 | 3,557 | 3,526 | ||||||||||||||||
| Opened | 27 | 19 | 66 | 53 | ||||||||||||||||
| Closed (net of re-openings) | (5 | ) | (5 | ) | (30 | ) | (22 | ) | ||||||||||||
| Total at end of period | 3,593 | 3,557 | 3,593 | 3,557 | ||||||||||||||||
| ? | Three months ended August 31, |
Fiscal year ended August 31, |
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| ? | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||
| Sales Analysis: | ||||||||||||||||||||
| Company Drive-Ins: | ||||||||||||||||||||
| Total sales | $ | 72,601 | $ | 111,456 | $ | 296,101 | $ | 425,795 | ||||||||||||
| Average drive-in sales | 316 | 313 | 1,134 | 1,142 | ||||||||||||||||
| Change in same-store sales | (4.8 | )% | (3.0 | )% | (4.7 | )% | 1.7 | % | ||||||||||||
| Franchised Drive-Ins: | ||||||||||||||||||||
| Total sales | $ | 1,136,856 | $ | 1,125,655 | $ | 4,112,062 | $ | 4,092,303 | ||||||||||||
| Average drive-in sales | 344 | 355 | 1,260 | 1,301 | ||||||||||||||||
| Change in same-store sales | (3.2 | )% | (1.8 | )% | (3.2 | )% | 2.7 | % | ||||||||||||
| System: | ||||||||||||||||||||
| Change in total sales | (2.2 | )% | (0.8 | )% | (2.4 | )% | 3.5 | % | ||||||||||||
| Average drive-in sales | $ | 342 | $ | 351 | $ | 1,250 | $ | 1,284 | ||||||||||||
| Change in same-store sales | (3.3 | )% | (2.0 | )% | (3.3 | )% | 2.6 | % | ||||||||||||
Note: Change in same-store sales based on restaurants open for a minimum of 15 months.
| SONIC CORP. | |||||||||||||||||
| Unaudited Supplemental Information | |||||||||||||||||
| ? | |||||||||||||||||
| ? | Three months ended August 31, |
Fiscal year ended August 31, |
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| ? | 2017 | 2016 | 2017 | 2016 | |||||||||||||
| ? | (In thousands) | (In thousands) | |||||||||||||||
| Revenues: | |||||||||||||||||
| Company Drive-In sales | $ | 72,601 | $ | 111,456 | $ | 296,101 | $ | 425,795 | |||||||||
| Franchise Drive-Ins: | |||||||||||||||||
| Franchise royalties | 47,434 | 47,126 | 169,344 | 168,691 | |||||||||||||
| Franchise fees | 406 | 537 | 1,183 | 1,628 | |||||||||||||
| Lease revenue | 1,962 | 2,327 | 7,436 | 7,459 | |||||||||||||
| Other | 1,165 | 672 | 3,203 | 2,747 | |||||||||||||
| Total revenues | $ | 123,568 | $ | 162,118 | $ | 477,267 | $ | 606,320 | |||||||||
| ? | Three months ended August 31, |
Fiscal year ended August 31, |
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| ? | 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Margin Analysis (percentage of Company Drive-In sales): | |||||||||||||||||
| Company Drive-Ins: | |||||||||||||||||
| Food and packaging | 27.4 | % | 27.7 | % | 27.3 | % | 27.7 | % | |||||||||
| Payroll and employee benefits | 34.1 | 34.7 | 36.3 | 35.3 | |||||||||||||
| Other operating expenses | 19.2 | 20.6 | 20.8 | 20.8 | |||||||||||||
| Cost of Company Drive-In sales | 80.7 | % | 83.0 | % | 84.4 | % | 83.8 | % | |||||||||
| ? | August 31, | August 31, | |||||||||||||||
| ? | 2017 | 2016 | |||||||||||||||
| ? | (In thousands) | ||||||||||||||||
| Selected Balance Sheet Data: | |||||||||||||||||
| Cash and cash equivalents | $ | 22,340 | $ | 72,092 | |||||||||||||
| Current assets | 89,184 | 137,657 | |||||||||||||||
| Property, equipment and capital leases, net | 312,380 | 392,380 | |||||||||||||||
| Total assets | $ | 561,744 | $ | 648,661 | |||||||||||||
|
? |
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| Current liabilities, including capital lease obligations and long-term debt due within one year | $ | 58,616 | $ | 74,663 | |||||||||||||
| Obligations under capital leases due after one year | 16,167 | 17,391 | |||||||||||||||
| Long-term debt due after one year, net of debt issuance costs | 628,116 | 566,187 | |||||||||||||||
| Total liabilities | 763,502 | 724,304 | |||||||||||||||
| Stockholders’ deficit | $ | (201,758 | ) | $ | (75,643 | ) | |||||||||||
Categories: Financial