Sonic Reports Second Fiscal Quarter Earnings Per Share Growth of 14% Driven by Refranchising Gains

OKLAHOMA CITY–(hospitalitybusinessnews.com)–Sonic Corp., the nation’s largest chain of drive-in restaurants, today announced results for its second fiscal quarter ended February 28, 2017.

Key highlights of the company’s second quarter of fiscal year 2017 included:

  • Net income per diluted share increased 14% to $0.25 versus $0.22 in the prior-year period; adjusted net income per diluted share declined 17% to $0.15 versus $0.18 in the prior-year period;
  • System same-store sales declined 7.4%, consisting of a 7.3% same-store sales decrease at franchise drive-ins and an 8.9% decrease at company drive-ins;
  • Company drive-in margins declined by 330 basis points;
  • Ten new drive-ins opened and 54 drive-ins were refranchised; and
  • The company repurchased 1.8 million outstanding shares.

“Our second quarter results reflect a sluggish consumer environment, weather headwinds and share losses following exceptionally strong performance over the prior two years,” said Cliff Hudson, Sonic Corp. CEO. “As we enter the key spring and summer seasons, we believe a better balance of new product news and targeted value will result in sequential improvement in same-store sales and profitability.

“Our unit growth, capital structure and technology initiatives are on track,” continued Hudson. “We completed our refranchising program ahead of schedule with 54 drive-ins divested during the quarter, leaving us with a stronger portfolio of company-owned stores. We are also pleased to have repurchased 1.8 million shares of our stock in the second quarter of 2017, representing 4% of shares outstanding, while continuing to invest in the development, people and technology that will drive us to deliver the most personalized guest experience in the industry.”

Same-Store Sales

For the second quarter ended February 28, 2017, system same-store sales decreased 7.4%, which was comprised of a 7.3% same-store sales decline at franchise drive-ins and a decline of 8.9% at company drive-ins.

Financial Overview

For the second fiscal quarter of 2017, the company’s net income totaled $11.0 million or $0.25 per diluted share compared to net income of $10.8 million or $0.22 per diluted share in the same period of the prior year. Excluding the items outlined below, net income and net income per diluted share declined 27% and 17%, respectively.

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
February 28, 2017 February 29, 2016
Net Diluted Net Diluted Net Income Diluted EPS
Income EPS Income EPS $ Change % Change $ Change % Change
Reported – GAAP $ 10,963 $ 0.25 $ 10,819 $ 0.22 $ 144 1 % $ 0.03 14 %
Net gain on refranchising transactions (1) (6,788 ) (0.15 )
Tax impact on refranchising transactions (2) 2,445 0.05
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 )
Adjusted – Non-GAAP $ 6,620 $ 0.15 $ 9,023 $ 0.18 $ (2,403 ) (27 )% $ (0.03 ) (17 )%

____________

(1) During the second quarter of fiscal year 2017, we completed transactions to refranchise the operations of 54 drive-ins, one of which resulted in a gain of $7.8 million, and the other in a loss of $1.4 million. The loss transaction included a deferred gain of $1.0 million, which is recorded in other non-current liabilities, as a result of a real estate purchase option extended to the franchisee that will be exercised or expire between January 2020 and December 2023. Additionally, we received net lease payments of $0.4 million related to the first quarter transaction detailed in footnote 1 to the table below.
(2) Tax impact during the period at an adjusted effective tax rate of 36.0%.
(3) Tax impact during the period at an adjusted effective tax rate of 35.4%.

For the first six months of fiscal year 2017, net income totaled $24.1 million or $0.53 per diluted share compared with net income of $23.3 million or $0.46 per diluted share for the same period in 2016. Excluding the items outlined below, net income and net income per diluted share decreased 17% and 7%, respectively.

(In thousands, except per share amounts)

Six months ended Six months ended
February 28, 2017 February 29, 2016
Net Diluted Net Diluted Net Income Diluted EPS
Income EPS Income EPS $ Change % Change $ Change % Change
Reported – GAAP $ 24,081 $ 0.53 $ 23,277 $ 0.46 $ 804 3 % $ 0.07 15 %
Net gain on refranchising transactions (1) (5,831 ) (0.13 )
Tax impact on refranchising transactions (2) 2,105 0.04
Gain on sale of investment in refranchised drive-in operations (3) (3,795 ) (0.08 )
Tax impact on sale of investment in refranchised drive-in operations (4) 1,350 0.03
Gain on sale of real estate (1,875 ) (0.04 )
Tax impact on real estate sale (5) 664 0.01
Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters (585 ) (0.01 )
Adjusted – Non-GAAP $ 17,910 $ 0.39 $ 21,481 $ 0.42 $ (3,571 ) (17 )% $ (0.03 ) (7 )%

____________

(1) During the first quarter of fiscal year 2017, we completed transactions to refranchise the operations of 56 company drive-ins. Of the proceeds, $3.8 million represents the initial lease payment for a real estate purchase option that will be exercised or expire within 24 months, which resulted in a net loss of $1.0 million. Unless and until the option is exercised or expires, the franchisee will make monthly lease payments of $0.3 million through November 2017 and $0.1 million thereafter, through November 2018, which will be included in other operating income. We are including lease payments received, net of sub-lease expenses, to quantify the net refranchising gain (loss). Net payments received during the second quarter totaled $0.4 million. During the second quarter of fiscal year 2017, we completed transactions to refranchise the operations of 54 drive-ins, one of which resulted in a gain of $7.8 million, and the other in a loss of $1.4 million. The loss transaction included a deferred gain of $1.0 million, which is recorded in other non-current liabilities, as a result of a real estate purchase option extended to the franchisee that will be exercised or expire between January 2020 and December 2023.
(2) Combined tax impact at effective tax rates of 35.6% and 36.0% during the first and second quarters of fiscal year 2017, respectively.
(3) Gain on sale of investment in refranchised drive-ins 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 condensed consolidated statements of income.
(4) Tax impact during the period at an adjusted effective tax rate of 35.6%.
(5) 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 continues to expect 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 15.5% to 16.0%, depending upon the degree of same-store sales growth at company drive-ins;
  • Selling, general and administrative expenses of approximately $81 million to $82 million reflecting increased investment in human resources and technology to support brand initiatives, offset by lower incentive compensation;
  • Depreciation and amortization expense of $37.5 million to $38.5 million reflecting the divestiture of company drive-ins as previously announced;
  • Net interest expense of approximately $26.5 million to $27.5 million;
  • Capital expenditures of $40 million to $45 million reflecting ongoing investment into the company’s technology initiatives;
  • Free cash flow(1) of approximately $55 to $60 million;
  • An income tax rate between 34% to 35%;
  • The planned use of the remaining $75 million share repurchase authorization across the fiscal year, inclusive of refranchising proceeds; and
  • An expected quarterly cash dividend of $0.14 per share.

 

SONIC CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three months ended Six months ended

February 28,
2017

February 29,
2016

February 28,
2017

February 29,
2016

Revenues:
Company Drive-In sales $ 64,286 $ 95,313 $ 151,438 $ 199,196
Franchise Drive-Ins:
Franchise royalties and fees 34,328 36,047 74,467 75,969
Lease revenue 1,675 1,399 3,056 2,991
Other (131 ) 401 748 807
Total revenues 100,158 133,160 229,709 278,963
Costs and expenses:
Company Drive-Ins:
Food and packaging 17,616 26,213 41,732 55,159
Payroll and other employee benefits 25,332 35,359 57,098 71,723
Other operating expenses, exclusive of depreciation and amortization included below 14,278 20,100 33,704 43,008
Total cost of Company Drive-In sales 57,226 81,672 132,534 169,890
Selling, general and administrative 18,296 20,785 38,050 41,725
Depreciation and amortization 9,734 11,057 20,011 22,056
Other operating income, net (7,725 ) (2,566 ) (10,565 ) (2,965 )
Total costs and expenses 77,531 110,948 180,030 230,706
Income from operations 22,627 22,212 49,679 48,257
Interest expense 7,227 6,467 14,416 12,689
Interest income (262 ) (105 ) (756 ) (205 )
Net interest expense 6,965 6,362 13,660 12,484
Income before income taxes 15,662 15,850 36,019 35,773
Provision for income taxes 4,699 5,031 11,938 12,496
Net income $ 10,963 $ 10,819 $ 24,081 $ 23,277
Basic income per share $ 0.25 $ 0.22 $ 0.54 $ 0.47
Diluted income per share $ 0.25 $ 0.22 $ 0.53 $ 0.46
Weighted average basic shares 43,794 48,977 44,757 49,599
Weighted average diluted shares 44,550 49,988 45,547 50,656
SONIC CORP.
Unaudited Supplemental Information
Three months ended Six months ended

February 28,
2017

February 29,
2016

February 28,
2017

February 29,
2016

Drive-Ins in Operation:
Company:
Total at beginning of period 286 382 345 387
Opened 1 1
Sold to franchisees (54 ) (7 ) (110 ) (9 )
Closed (net of re-openings) (3 ) (3 )
Total at end of period 233 375 233 375
Franchise:
Total at beginning of period 3,273 3,147 3,212 3,139
Opened 9 5 23 18
Acquired from the company 54 7 110 9
Closed (net of re-openings) (7 ) (6 ) (16 ) (13 )
Total at end of period 3,329 3,153 3,329 3,153
System-wide:
Total at beginning of period 3,559 3,529 3,557 3,526
Opened 10 5 24 18
Closed (net of re-openings) (7 ) (6 ) (19 ) (16 )
Total at end of period 3,562 3,528 3,562 3,528
Three months ended Six months ended

February 28,
2017

February 29,
2016

February 28,
2017

February 29,
2016

($ in thousands) ($ in thousands)
Sales Analysis:
Company Drive-Ins:
Total sales $ 64,286 $ 95,313 $ 151,438 $ 199,196
Average drive-in sales 236 253 506 522
Change in same-store sales (8.9 )% 6.3 % (5.5 )% 5.3 %
Franchised Drive-Ins:
Total sales $ 856,514 $ 886,313 $ 1,830,399 $ 1,854,828
Average drive-in sales 262 283 566 593
Change in same-store sales (7.3 )% 6.5 % (4.5 )% 5.9 %
System-wide:
Change in total sales (6.2 )% 7.8 % (3.5 )% 6.7 %
Average drive-in sales $ 260 $ 280 $ 561 $ 585
Change in same-store sales (7.4 )% 6.5 % (4.6 )% 5.9 %

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

SONIC CORP.
Unaudited Supplemental Information
Three months ended Six months ended

February 28,
2017

February 29,
2016

February 28,
2017

February 29,
2016

(In thousands) (In thousands)
Revenues:
Company Drive-In sales $ 64,286 $ 95,313 $ 151,438 $ 199,196
Franchise Drive-Ins:
Franchise royalties 34,138 35,807 74,021 75,269
Franchise fees 190 240 446 700
Lease revenue 1,675 1,399 3,056 2,991
Other (131 ) 401 748 807
Total revenues $ 100,158 $ 133,160 $ 229,709 $ 278,963
Three months ended Six months ended

February 28,
2017

February 29,
2016

February 28,
2017

February 29,
2016

Margin Analysis (percentage of Company Drive-In sales):
Company Drive-Ins:
Food and packaging 27.4 % 27.5 % 27.6 % 27.7 %
Payroll and employee benefits 39.4 37.1 37.7 36.0
Other operating expenses 22.2 21.1 22.2 21.6
Cost of Company Drive-In sales 89.0 % 85.7 % 87.5 % 85.3 %

February 28,
2017

August 31,
2016

(In thousands)
Selected Balance Sheet Data:
Cash and cash equivalents $ 33,890 $ 72,092
Current assets 94,840 137,657
Property, equipment and capital leases, net 359,119 392,380
Total assets $ 571,664 $ 648,661
Current liabilities, including capital lease obligations and long-term debt due within one year $ 56,681 $ 74,663
Obligations under capital leases due after one year 16,270 17,391
Long-term debt due after one year, net of debt issuance costs 593,147 566,187
Total liabilities 729,355 724,304
Stockholders’ equity (deficit) $ (157,691 ) $ (75,643 )
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