Fast-food restaurant Sonic (click ticker for report: ) reported solid second quarter results Monday afternoon. Revenue fell 3% year-over-year to $111 million as the company lapped a leap year in the same period of last year, putting the number in-line with consensus estimates. Nevertheless, earnings increased 67% year-over-year to $0.05 per share, which was also in-line with consensus expectations.
For the quarter, same-store sales (excluding the extra day) jumped 1.3% year-over-year on a systemwide basis, but rose 3.3% at company owned locations. Divergence between company-owned and franchise-owned restaurants is not uncommon, and this continued gap could continue for a variety of reasons, including the owner’s skill level and promotional execution. Regardless, the results were relatively strong, suggesting the company could be taking market share from larger competitors like McDonald’s (click ticker for report: ).
On the cost side, SG&A was roughly flat at 13.9% of sales, but we think the firm would have received additional leverage under an apples-to-apples comparison. Food costs actually declined 20 basis points year-over-year to 28.1% of sales. The company’s input commodities are mostly locked-in for fiscal year 2013, so the company feels relatively confident in cost containment going forward. However, any food gross margin expansion remains unclear, as the company said:
We have locked in the cost for over 80% of our commodities in FY 2013 and currently expect inflation to be in the 1% to 2% range for the remainder of the fiscal year. We will be lapping over a 1.5% to 2% price increase in May of this quarter. We are planning to take a small price increase in May. However, the new price increase implemented this May will be conservative in light of the still fragile consumer environment. Overall, we expect to see continued moderate improvement in the food and packaging costs for the year.
While profit will be stronger in fiscal year 2013 than in 2012, 2014 and 2015 look like the firm’s more robust growth years. Not only does the company expect to begin more robust restaurant development in fiscal year 2014, but approximately 850 restaurant royalty rates are likely to increase in fiscal year 2015. Both events could materially boost earnings, as well as free cash flow.
For the current year, management anticipates $45-$50 million in free cash flow driven by a low-single-digit increase in same-store sales and 50 to 100 basis points in drive-in operating margin expansion. Although the long-term situation looks solid, we believe shares look fairly valued at this time.