Sonic Reports First Fiscal Quarter 2018 Earnings Per Share Growth

Sonic Corp. (NASDAQ: SONC), the nation’s largest chain of drive-in restaurants, today announced results for its first fiscal quarter ended November 30, 2017.

Key highlights of the company’s first quarter of fiscal year 2018 included:

  • Net income per diluted share increased 4% to $0.29 versus $0.28 in the prior-year period; adjusted net income per diluted share increased 25% to $0.30 versus $0.24 in the prior-year period;
  • System same-store sales declined 1.7%, consisting of a 1.6% same-store sales decrease at franchise drive-ins and a 3.2% decrease at company drive-ins;
  • Company drive-in margins declined 0.1%;
  • 5 new drive-ins opened; and
  • The company repurchased 1.7 million outstanding shares.

“As expected, our first quarter same-store sales declined modestly versus prior year reflecting continued intense competitive pressure and unfavorable weather,” said Cliff Hudson, Sonic Corp. CEO. “Excluding the impact of weather, same-store sales were flat, indicating an improvement in underlying traffic trends.

“During the quarter, we promoted the Carhop Classic for $2.99, featuring our full-sized cheeseburger and medium hand-made onion rings, a value offering with a highly compelling price point, broad consumer appeal and strong quality differentiation. In addition to driving improved traffic, the introduction of a sharper everyday value message also improved value and quality scores from customers, validating our evolution to more focused and consistent national value promotions. We will continue to refine this strategy as we move through the remainder of the fiscal year, seeking to balance everyday value and consistent profitability for franchisees while staying true to Sonic’s core tenets of quality, differentiation and innovation.

“While price competition remains fierce, we are hard at work driving the business in areas we can control. We continue to refine our current media strategies, resulting in increased impressions on national cable today and new creative content in the market this spring. We have growing confidence in our product pipeline as we look out to the key summer season and our mobile order ahead pilot is underway.

“Finally, we continue to optimize our capital structure and return cash to shareholders. During the quarter, we repurchased 1.7 million shares, or 4% of shares outstanding, for $40.8 million. We have increased our targeted leverage range to 3.5-4.5x net-debt-to-EBITDA and anticipate concluding the year at the higher end of the range.”

Financial Overview

For the first fiscal quarter of 2018, the company’s net income totaled $11.4 million or $0.29 per diluted share compared to net income of $13.1 million or $0.28 per diluted share in the same period of the prior year. Excluding the items outlined below, net income increased 5% and net income per diluted share increased 25%.

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.

(In thousands, except per share amounts)

Three months ended Three months ended
November 30, 2017 November 30, 2016
Net Diluted Net Diluted Net Income Diluted EPS
Income EPS Income EPS $ Change % Change $ Change % Change
Reported – GAAP $ 11,430 $ 0.29 $ 13,118 $ 0.28 $ (1,688 ) (13 )% $ 0.01 4 %
Payment card breach expense (1) 642 0.02
Tax impact on payment card breach expense (2) (245 ) (0.01 )
Net loss on refranchising transactions (3) 957 0.02
Tax impact on refranchising transactions (4) (340 ) (0.01 )
Gain on sale of investment in refranchised drive-in operations (5) (3,795 ) (0.08 )
Tax impact on sale of investment in refranchised drive-in operations (4) 1,350 0.03
Adjusted – Non-GAAP $ 11,827 $ 0.30 $ 11,290 $ 0.24 $ 537 5 % $ 0.06 25 %

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%(1) year over year, excluding the impact of the recently passed federal tax legislation. 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(2) of approximately $60 million to $65 million(1);
  • An income tax rate of approximately 35%(1);
  • The repurchase of approximately $160 million in shares across the fiscal year; and
  • An expected quarterly cash dividend of $0.16 per share.

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 $9.5 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
November 30,
? 2017 2016
Revenues:
Company Drive-In sales $ 62,540 $ 87,152
Franchise Drive-Ins:
Franchise royalties and fees 40,778 40,139
Lease revenue 1,684 1,381
Other 426 879
Total revenues 105,428 129,551
?
Costs and expenses:
Company Drive-Ins:
Food and packaging 17,713 24,116
Payroll and other employee benefits 22,774 31,766
Other operating expenses, exclusive of depreciation and amortization included below 13,579 19,426
Total cost of Company Drive-In sales 54,066 75,308
?
Selling, general and administrative 19,769 19,754
Depreciation and amortization 9,366 10,277
Other operating income, net (221 ) (2,840 )
Total costs and expenses 82,980 102,499
Income from operations 22,448 27,052
?
Interest expense 7,675 7,189
Interest income (382 ) (494 )
Net interest expense 7,293 6,695
Income before income taxes 15,155 20,357
Provision for income taxes 3,725 7,239
Net income $ 11,430 $ 13,118
?
Basic income per share $ 0.29 $ 0.29
Diluted income per share $ 0.29 $ 0.28
?
Weighted average basic shares 39,327 45,720
Weighted average diluted shares 39,885 46,543
SONIC CORP.
Unaudited Supplemental Information
?
Three months ended
November 30,
2017 2016
Drive-Ins in Operation:
Company:
Total at beginning of period 228 345
Opened
Sold to franchisees (56 )
Closed (net of re-openings) (3 )
Total at end of period 228 286
Franchise:
Total at beginning of period 3,365 3,212
Opened 5 14
Acquired from the company 56
Closed (net of re-openings) (10 ) (9 )
Total at end of period 3,360 3,273
System:
Total at beginning of period 3,593 3,557
Opened 5 14
Closed (net of re-openings) (10 ) (12 )
Total at end of period 3,588 3,559
? Three months ended
November 30,
? 2017 2016
($ in thousands)
Sales Analysis:
Company Drive-Ins:
Total sales $ 62,540 $ 87,152
Average drive-in sales 274 270
Change in same-store sales (3.2 )% (2.4 )%
Franchised Drive-Ins:
Total sales $ 994,942 $ 975,782
Average drive-in sales 300 304
Change in same-store sales (1.6 )% (2.0 )%
System:
Change in total sales (0.5 )% (0.9 )%
Average drive-in sales $ 298 $ 301
Change in same-store sales (1.7 )% (2.0 )%

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

SONIC CORP.
Unaudited Supplemental Information
?
? Three months ended
November 30,
? 2017 2016
? (In thousands)
Revenues:
Company Drive-In sales $ 62,540 $ 87,152
Franchise Drive-Ins:
Franchise royalties 40,627 39,882
Franchise fees 151 257
Lease revenue 1,684 1,381
Other 426 879
Total revenues $ 105,428 $ 129,551
? Three months ended
November 30,
? 2017 2016
Margin Analysis (percentage of Company Drive-In sales):
Company Drive-Ins:
Food and packaging 28.3 % 27.7 %
Payroll and employee benefits 36.4 36.4
Other operating expenses 21.8 22.3
Cost of Company Drive-In sales 86.5 % 86.4 %
? November 30, August 31,
? 2017 2017
? (In thousands)
Selected Balance Sheet Data:
Cash and cash equivalents $ 23,532 $ 22,340
Current assets 86,715 89,184
Property, equipment and capital leases, net 305,907 312,380
Total assets $ 552,913 $ 561,744
?
Current liabilities, including capital lease obligations and long-term debt due within one year $ 47,988 $ 58,616
Obligations under capital leases due after one year 15,573 16,167
Long-term debt due after one year, net of debt issuance costs 666,600 628,116
Total liabilities 790,193 763,502
Stockholders’ deficit $ (237,280 ) $ (201,758 )

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.

(In thousands)

Three months ended
November 30, 2017
Three months ended
November 30, 2016

Reported
GAAP

Adjustments

Adjusted
Non-GAAP

Reported
GAAP

Adjustments

Adjusted
Non-GAAP

Total Revenues $ 105,428 $ $ 105,428 $ 129,551

$

$ 129,551
Total cost of Company Drive-in sales 54,066

54,066 75,308

75,308
Selling, general and administrative 19,769

(642

) (1) 19,127 19,754

19,754
Depreciation and amortization 9,366

9,366 10,277

10,277
Other operating income, net (221 )

(221 ) (2,840 )

2,838

(2) (2 )
Total cost and expenses 82,980

(642

) 82,338 102,499

2,838

105,337
Income from Operations $ 22,448

$

642

$ 23,090 $ 27,052

$

(2,838

)

$ 24,214