Sonic experiences lower-than-expected Q4 sales

by Monica Watrous
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Sonic  
Sonic's ice cream business underperformed in the summer months. 
 

OKLAHOMA CITY — Sonic Corp. sold less ice cream during the summer, a symptom of an industry-wide slowdown and a trend that led to lower-than-expected sales and profits in the recent quarter.

Net income in the fiscal year ended Aug. 31 was $64,067,000, equal to $1.32 per share on the common stock, which compared with $64,485,000, or $1.23 per share, in the previous year. Total revenues rose slightly to $606,320,000 from $606,089,000.

Net income in the fourth quarter was $25,437,000, or 54 cents per share, which compared with $26,296,000, or 51 cents per share, in the prior-year period. Total revenues eased to $162,118,000 from $175,266,000.

 Sonic
Sonic Corp.'s total revenues rose slightly to $606,320,000 from $606,089,000. 
 

For the full year, system same-store sales increased 2.6 percent, which included a 2.7 percent same-store sales increase at franchise drive-ins and a 1.7 percent increase at company drive-ins. For the fourth quarter, system same-store sales declined 2 percent, reflecting a 1.8 percent same-store sales decrease at franchise drive-ins and a decline of 3 percent at company drive-ins.

Cliff
Cliff Hudson, CEO of Sonic

“While there are always many cross-currents impacting the business, right now, one of the biggest impacts is food deflation,” said Cliff Hudson, CEO, during an Oct. 24 earnings call with financial analysts. “In the immediate term, our view is that this deflation is impacting consumer buying patterns and channel preferences. But it’s also heightening the depth and frequency of competitive activity, as well as consumer sensitivity to discounting. And this persistent upward pressure on labor costs, in our view will continue to make this environment that much more difficult to manage in the near term.”

Sonic’s ice cream business, for example, underperformed in the summer months, driven in part by what Hudson called a “meaningful encroachment from the grocery channel, where ice cream sales were growing above the long-term trend.”

And while Sonic continues to perform well with its loyal customers, those who visit the chain eight times or more a year, the company has noted more variability with newer or less frequent customers, Hudson added.

 Sonic
Sonic is targeting the value-driven consumer with deals such as buy one get one wings. 
 

“They’re frequent brand switchers and are more value driven,” he said. “That’s more likely to be influenced by a broader environment. There’s no doubt this group of consumers helped drive our market share over the last several years, and it’s critical that we continue to win them back over time.

“Now, how are we responding in this environment? Well, we’ve made significant progress at dinner and evening, in particular, through increased focus on value… And we see the opportunity to use these types of tactics during other day parts, and we should see progress as we get to the other side of some really difficult comparisons in the second half of the fiscal year.”

Looking ahead, executives expect low commodity costs, resulting in an aggressive promotional and pricing environment, to continue to pressure sales and earnings.

 

 Sonic
Through increased focus on value, Sonic has made progress at dinner and evening. 
 

“…five months into a more difficult environment, broader environment, I can tell you that, first, we don’t believe we’re at the beginning of any kind of long downturn for our business or the industry,” Hudson said. “We’ve seen pockets of weakness before, and we can manage through it.

“And also, I would say, I believe we have a better understanding of the new value equation in the marketplace and the interplay between cost deflation, competitive activity, consumer channel shifts and the like.”

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