Sonic Reports Fourth Fiscal Quarter and Fiscal 2016 Results

OKLAHOMA CITY–(hospitalitybusinessnews.com)–Sonic Corp., the nation’s largest chain of drive-in restaurants, today announced results for its fourth fiscal quarter and year ended August 31, 2016.

Key highlights of the company’s fourth quarter of fiscal year 2016 included:

  • Net income per diluted share increased 6% to $0.53 compared with $0.50 in the same period prior year; adjusted net income per diluted share increased 5% to $0.45 compared with adjusted net income per diluted share of $0.43 in the prior-year period;
  • System same-store sales decreased 2.0%, consisting of a 1.8% same-store sales decrease at franchise drive-ins and a decrease of 3.0% at company drive-ins;
  • Company drive-in margins contracted by 210 basis points;
  • Eighteen new franchise drive-ins opened;
  • The company commenced its refranchising initiative to move toward an approximately 95%-franchised system by the end of fiscal year 2017; and
  • The company purchased 1.3 million shares of its common stock.

Key highlights of the company’s fiscal year 2016 included:

  • Net income per diluted share was $1.29 compared with $1.20 in the prior year; adjusted net income per diluted share increased 17% to $1.29 compared with adjusted net income per diluted share of $1.10 in the prior year;
  • System same-store sales increased 2.6%, consisting of a 2.7% same-store sales increase at franchise drive-ins and an increase of 1.7% at company drive-ins;
  • Company drive-in margins contracted by 30 basis points;
  • Thirty-one net new drive-ins opened;
  • The company purchased more than 5.2 million shares of its common stock, representing approximately 10% of outstanding shares for the fiscal year.

“We delivered good overall performance in fiscal 2016, including 2.6% system-wide same-store sales growth. Slowing consumer trends that began in April, however, persisted through the fourth quarter, resulting in lower-than-expected sales and profits in the fourth fiscal quarter,” said Cliff Hudson, Sonic Corp. CEO. “At the same time, we are pleased to see approximately 1% net unit growth for fiscal 2016 with 31 net new units, sound progress towards our net unit growth goal of 2% to 3% by the end of the decade.

“While our unit growth, capital structure and refranchising initiatives are performing well, low commodity costs, resulting in an aggressive promotional and pricing environment, are expected to continue to pressure sales and earnings in fiscal year 2017, particularly in the first half of the year. We believe our current initiatives to deliver one of the most differentiated customer experiences will improve sales late in the fiscal year. This, combined with a more-highly franchised system, better company drive-in margins, penetration of digital POPS units in 80% of our system, a strong development pipeline, and a significantly lower number of shares outstanding, provides a solid foundation for good sales and earnings growth over the next few years.”

Same-Store Sales

For the fourth quarter ended August 31, 2016, system same-store sales decreased 2.0%, which was comprised of a 1.8% same-store sales decline at franchise drive-ins and a decline of 3.0% at company drive-ins.

Financial Overview

For the fourth fiscal quarter of 2016, the company’s net income totaled $25.4 million or $0.53 per diluted share compared to net income of $26.3 million or $0.50 per diluted share in the same period of the prior year. Excluding the items outlined below, net income declined 6% and net income per diluted share increased 5%.

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
August 31, 2016 August 31, 2015
Net Diluted Net Diluted Net Income Diluted EPS
Income EPS Income EPS

$ Change

% Change

$ Change

% Change

Reported – GAAP $ 25,437 $ 0.53 $ 26,296 $ 0.50 $ (859 ) (3) % $ 0.03 6 %
Gain on sale of Company Drive-Ins (972 ) (0.02 )
Tax impact on Company Drive-Ins sale (1) 317 0.00
FIN 48 release of income tax credits and deductions (3,038 ) (0.06 )
Federal tax benefit of prior-year statutory tax deduction (1,477 ) (0.03 )
Change in deferred tax valuation allowance (1,701 ) (0.04 )
Adjusted – Non-GAAP $ 21,744 $ 0.45 $ 23,118 $ 0.43 $ (1,374 ) (6) % $ 0.02 5 %

_________

(1) Tax impact during the period at an adjusted effective tax rate of 32.6%

For fiscal year 2016, net income totaled $64.1 million or $1.29 per diluted share compared with net income of $64.5 million or $1.20 per diluted share for fiscal year 2015. Excluding the items outlined below, net income and net income per diluted share increased 8% and 17%, respectively.

(In thousands, except per share amounts)

Fiscal Year Ended Fiscal Year Ended
August 31, 2016 August 31, 2015
Net Diluted Net Diluted Net Income Diluted EPS
Income EPS Income EPS

$ Change

% Change

$ Change

% Change

Reported – GAAP $ 64,067 $ 1.29 $ 64,485 $ 1.20 $ (418 )

(1)

% $ 0.09 8 %
Gain on sale of Company Drive-Ins (972 ) (0.02 )
Tax impact on Company Drive-Ins sale (1) 317 0.00
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(2) (3,027 ) (0.06 )
Gain on sale of real estate (1,875 ) (0.04 )
Tax impact on real estate sale (3) 664 0.01
Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters (585 ) (0.01 ) (666 ) (0.01 )
Federal tax benefit of prior-year statutory tax deduction (3,199 ) (0.06 )
Change in deferred tax valuation allowance (1,701 ) (0.04 )
Retroactive effect of federal tax law change 612 0.01
Adjusted – Non-GAAP $ 64,301 $ 1.29 $ 59,531 $ 1.10 $ 4,770 8 % $ 0.19 17 %

_________

(1) Tax impact during the period at an adjusted effective tax rate of 32.6%.
(2) Tax impact during the period at an effective tax rate of 34.6%.
(3) Tax impact during the period at an adjusted effective tax rate of 35.4%

Fiscal Year 2017 Outlook

While the macroeconomic environment may impact results, the company expects adjusted earnings per share for fiscal year 2017 to be in the range of down 7% to flat year over year. The outlook for fiscal 2017 anticipates the following elements:

  • (2)% to 0% same-store sales for the system;
  • Royalty revenue growth from new unit development;
  • 65 to 75 new franchise drive-in openings;
  • Drive-in-level margins of 16-17%, depending upon the timing of drive-in divestitures and the degree of same-store sales growth at company drive-ins;
  • Selling, general and administrative expenses of approximately $85.0 million to $86.0 million reflecting increased investment in human resources and technology to support brand initiatives;
  • Depreciation and amortization expense of $42.0 million to $44.0 million reflecting the divestiture of company drive-ins as previously announced;
  • Capital expenditures of $40 million to $45 million reflecting ongoing investment into the company’s technology initiatives;
  • Free cash flow(1) of approximately $60 million to $65 million;
  • An income tax rate between 35.0% to 36.0%;
  • The planned repurchase of at least $173 million of stock across the fiscal year, inclusive of refranchising proceeds; and
  • An expected quarterly cash dividend of $0.14 per share.

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

 

SONIC CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three months ended Fiscal Year Ended
August 31, August 31,
2016 2015 2016 2015
Revenues:
Company Drive-In sales $ 111,456 $ 125,215 $ 425,795 $ 436,031
Franchise Drive-Ins:
Franchise royalties and fees 47,663 46,967 170,319 161,342
Lease revenue 2,327 1,970 7,459 5,583
Other 672 1,114 2,747 3,133
Total revenues 162,118 175,266 606,320 606,089
Costs and expenses:
Company Drive-Ins:
Food and packaging 30,888 34,573 118,136 121,701
Payroll and other employee benefits 38,625 41,752 150,260 151,801
Other operating expenses, exclusive of
depreciation and amortization included below 22,974 24,952 88,424 90,436
Total cost of Company Drive-In sales 92,487 101,277 356,820 363,938
Selling, general and administrative 19,748 21,711 82,089 79,336
Depreciation and amortization 10,956 11,258 44,418 45,892
Provision for impairment of long-lived assets 155 1,393 232 1,440
Other operating (income) expense, net (1,543) (902) (4,691) (945)
Total costs and expenses 121,803 134,737 478,868 489,661
Income from operations 40,315 40,529 127,452 116,428
Interest expense 7,249 6,133 26,714 25,114
Interest income (190) (118) (516) (408)
Debt extinguishment costs 8,750
Net interest expense 7,059 6,015 34,948 24,706
Income before income taxes 33,256 34,514 92,504 91,722
Provision for income taxes 7,819 8,218 28,437 27,237
Net income $ 25,437 $ 26,296 $ 64,067 $ 64,485
Basic income per share $ 0.54 $ 0.51 $ 1.32 $ 1.23
Diluted income per share $ 0.53 $ 0.50 $ 1.29 $ 1.20
Weighted average basic shares 47,237 51,736 48,703 52,572
Weighted average diluted shares 48,037 52,936 49,669 53,953
SONIC CORP.
Unaudited Supplemental Information
Three months ended Fiscal Year Ended
August 31, August 31,
2016 2015 2016 2015
Drive-Ins in Operation:
Company:
Total at beginning of period 375 394 387 391
Opened 1 1 3
Sold to franchisees (29 ) (7 ) (38 ) (6 )
Closed (net of re-openings) (2 ) (5 ) (1 )
Total at end of period 345 387 345 387
Franchise:
Total at beginning of period 3,168 3,118 3,139 3,127
Opened 18 18 52 38
Acquired from the company 29 7 38 6
Closed (net of re-openings) (3 ) (4 ) (17 ) (32 )
Total at end of period 3,212 3,139 3,212 3,139
System-wide:
Total at beginning of period 3,543 3,512 3,526 3,518
Opened 19 18 53 41
Closed (net of re-openings) (5 ) (4 ) (22 ) (33 )
Total at end of period 3,557 3,526 3,557 3,526
Three months ended Fiscal Year Ended
August 31, August 31,
2016 2015 2016 2015
($ in thousands) ($ in thousands)
Sales Analysis:
Company Drive-Ins:
Total sales $ 111,456 $ 125,215 $ 425,795 $ 436,031
Average drive-in sales 313 319 1,142 1,116
Change in same-store sales (3.0) % 4.5 % 1.7 % 6.9 %
Franchised Drive-Ins:
Total sales $ 1,125,655 $ 1,121,219 $ 4,092,303 $ 3,931,365
Average drive-in sales 355 360 1,301 1,261
Change in same-store sales (1.8) % 4.9 % 2.7 % 7.3 %
System-wide:
Change in total sales (0.8) % 5.9 % 3.5 % 8.3 %
Average drive-in sales $ 351 $ 355 $ 1,284 $ 1,244
Change in same-store sales (2.0) % 4.9 % 2.6 % 7.3 %

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

SONIC CORP.
Unaudited Supplemental Information
Three months ended Fiscal Year Ended
August 31, August 31,
2016 2015 2016 2015
(In thousands) (In thousands)
Revenues:
Company Drive-In sales $ 111,456 $ 125,215 $ 425,795 $ 436,031
Franchise Drive-Ins:
Franchise royalties 47,126 46,259 168,691 158,813
Franchise fees 537 708 1,628 2,529
Lease revenue 2,327 1,970 7,459 5,583
Other 672 1,114 2,747 3,133
Total revenues $ 162,118 $ 175,266 $ 606,320 $ 606,089
Three months ended Fiscal Year Ended
August 31, August 31,
2016 2015 2016 2015
Margin Analysis (percentage of Company Drive-In sales):
Company Drive-Ins:
Food and packaging 27.7 % 27.6 % 27.7 % 27.9 %
Payroll and employee benefits 34.7 33.4 35.3 34.8
Other operating expenses 20.6 19.9 20.8 20.8
Cost of Company Drive-In sales 83.0 % 80.9 % 83.8 % 83.5 %
August 31, August 31,
2016 2015
(In thousands)
Selected Balance Sheet Data:
Cash and cash equivalents $ 72,092 $ 27,191
Current assets 137,657 85,438
Property, equipment and capital leases, net 402,162 421,406
Total assets $ 659,995 $ 620,024
Current liabilities, including capital lease obligations and
long-term debt due within one year $ 74,663 $ 87,821
Obligations under capital leases due after one year 17,391 20,763
Long-term debt due after one year 577,521 428,238
Total liabilities 735,638 602,591
Stockholders’ equity (deficit) $ (75,643) $ 17,433
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