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Sonic Reports Year-End 2010 Results

2010-10-19

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Sonic Corp System-wide same-store sales declined 6.4% during the fourth quarter, with same-store sales declining 6.4% at franchise drive-ins and 6.1% at company-owned drive-ins

Sonic Corp. (NASDAQ: SONC), the nation's largest chain of drive-in restaurants, today announced results for the fourth quarter and fiscal year ended August 31, 2010. Key aspects of the company's fourth quarter report included:

“Clearly, recent consumer sentiment measures underscore the continuation of a challenging operating environment”

Net income per diluted share totaled $0.08 versus net income per diluted share of $0.28 in the year-earlier quarter;
Excluding special items, net income per diluted share was $0.23 in the fourth quarter of 2010 versus $0.29 in the same period last year (see reconciliation later in this release);
System-wide same-store sales declined 6.4% during the fourth quarter, with same-store sales declining 6.4% at franchise drive-ins and 6.1% at company-owned drive-ins; and
Franchise drive-in openings totaled 24 for the quarter versus 40 in the same period last year.

"The fourth quarter offered some signs that our initiatives are gaining traction," said Clifford Hudson, Chairman and Chief Executive Officer. "One positive indicator was the sales performance of our company-owned drive-ins. After lagging franchise drive-ins significantly for almost three years, our company-owned drive-ins closed much of the gap in same-store sales in the third quarter and pulled slightly ahead of franchise drive-ins in the fourth quarter. In the near term, improvements in sales and margins at company-owned drive-ins can have the largest potential impact on Sonic's earnings and stockholder value, so we are pleased to see ongoing progress in this area of our business.

"In addition, since the beginning of September both franchise and company-owned drive-ins have seen improving same-store sales trends," Hudson continued. "We are encouraged by this development."

Hudson added, "The initiatives we introduced in 2009 and 2010 are re-emphasizing the qualities that make Sonic distinctive – high-quality products, new product news and service differentiation with skating carhops. Backed by new messaging and an innovative media allocation strategy, we expect these initiatives will continue to contribute to improved system-wide same-store sales performance in fiscal 2011."

Income Statement Overview

For the fourth quarter ended August 31, 2010, revenues declined 10% to $155.1 million from $171.8 million in the year-earlier period. Net income for the fourth quarter of fiscal 2010 was $4.7 million or $0.08 per diluted share versus $16.9 million or $0.28 per diluted share in the year-earlier quarter.

During the fourth quarter of fiscal 2010, the company recognized an impairment charge of $15.0 million ($9.8 million after-tax), primarily comprised of a write down to fair value of company-owned drive-ins. In the prior-year period, the company recognized gains of $2.0 million ($1.4 million after-tax) from refranchising company-owned drive-ins, which was offset by a $3.3 million ($2.0 million after-tax) impairment charge. Excluding these special items, net income and net income per diluted share for the fourth quarter declined 17% and 21%, respectively.

The non-GAAP adjustments outlined below are intended to supplement the presentation of the company's financial results in accordance with GAAP. The company believes that the presentation of these items 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.


	Quarter Ended August 31, 2010					Quarter Ended August 31, 2009						Year-Over-Year Percent Change
	Net Income		Diluted EPS			Net Income			Diluted EPS			Net Income		Diluted EPS
Reported - GAAP	$	4,655	$	0.08		$	16,887		$	0.28		-72	%	-71	%
After-tax impact of:
Refranchising (gain) loss		--		--			(1,382	)		(0.02	)	--		--
Impairment provision		9,837		0.16			2,013			0.03		--		--
Adjusted - Non-GAAP	$	14,492	$	0.23	*	$	17,518		$	0.29		-17	%	-21	%

*The difference in the total adjusted EPS and the individual adjustments reflects rounding.

For the fiscal year, revenues declined 22% to $550.9 million from $706.3 million in the prior year. The majority of the decline in revenues was attributable to the company's refranchising initiative, which resulted in more than 200 company-owned drive-ins being refranchised during the latter half of fiscal 2009. Net income was $21.2 million or $0.34 per diluted share for fiscal 2010 compared with $49.4 million or $0.81 per diluted share for fiscal 2009.

In fiscal 2010, the company recorded a tax benefit of $1.8 million associated with the company's stock option exchange program that was completed in the third quarter of fiscal 2010, losses of $0.8 million ($0.5 million after-tax) from refranchising company-owned drive-ins, and impairment charges of $15.2 million ($9.7 million after-tax). In fiscal 2009, the company recorded refranchising gains totaling $12.5 million ($8.1 million after-tax) and a gain on debt extinguishment of $6.4 million ($3.9 million after-tax), which were partially offset by impairment charges totaling $11.2 million ($6.9 million after-tax). Excluding these special items, net income and net income per diluted share for fiscal 2010 declined 32% and 33%, respectively.


	Fiscal Year Ended August 31, 2010						Fiscal Year Ended August 31, 2009						Year-Over-Year Percent Change
	Net Income			Diluted EPS			Net Income			Diluted EPS			Net Income		Diluted EPS
Reported - GAAP	$	21,209		$	0.34		$	49,442		$	0.81		-57	%	-58	%
After-tax impact of:
Refranchising (gain) loss		492			0.01			(8,096	)		(0.13	)	--		--
Impairment provision		9,776			0.16			6,871			0.10		--		--
Tax benefit of stock option exchange program		(1,751	)		(0.03	)		--			--
Debt extinguishment (gain) loss		202			--			(3,928	)		(0.06	)
Adjusted - Non-GAAP	$	29,928		$	0.48		$	44,289		$	0.72		-32	%	-33	%

Same-Store Sales

For the fourth fiscal quarter ended August 31, 2010, system-wide same-store sales declined 6.4% versus a decrease of 4.5% for the same quarter last year and reflected 6.4% lower same-store sales at franchise drive-ins and 6.1% lower same-store sales at company-owned drive-ins. For fiscal 2010, system-wide same-store sales declined 7.8% versus a decrease of 4.3% in the prior-year period. The decline in system-wide same-store sales for fiscal 2010 reflected 7.6% lower same-store sales at franchise drive-ins and an 8.8% decline at company-owned drive-ins.

Concluding Comments

"Clearly, recent consumer sentiment measures underscore the continuation of a challenging operating environment," Hudson added. "Still, we expect improving same-store sales in fiscal 2011 as our sales-building initiatives improve traffic. These initiatives, which emphasize the surprise-and-delight Sonic experience, a strong focus on customer service and high-quality and distinctive products, lay the groundwork for growth in the years ahead."


SONIC CORP.
Unaudited Supplemental Information
(In thousands, except per share amounts)

	Fourth Quarter Ended August 31,						Fiscal Year Ended August 31,
	2010			2009			2010			2009
Statement of Operations
Revenues:
Company-owned drive-in sales	$	115,406		$	128,402		$	414,369		$	567,436
Franchise drive-ins:
Franchise royalties		35,764			37,944			122,385			126,706
Franchise fees		816			1,634			2,752			5,006
Lease revenue		1,795			2,532			6,879			4,369
Other		1,291			1,320			4,541			2,765
		155,072			171,832			550,926			706,282
Costs and expenses:
Company-owned drive-ins:
Food and packaging		31,888			35,408			114,281			156,521
Payroll and other employee benefits		40,548			41,204			145,688			186,545
Other operating expenses		25,149			27,708			94,690			121,810
		97,585			104,320			354,659			464,876

Selling, general and administrative		16,295			14,476			66,847			63,358
Depreciation and amortization		10,657			11,062			42,615			48,064
Provision for impairment of long-lived assets		14,973			3,260			15,161			11,163
		139,510			133,118			479,282			587,461
Other operating income (expense)		(58	)		1,991			(763	)		12,507

Income from operations		15,504			40,705			70,881			131,328

Interest expense		8,281			10,018			36,707			43,457
(Gain) loss from early extinguishment of debt		--			--			314			(6,382	)
Interest income		(204	)		(334	)		(948	)		(1,418	)
Net interest expense		8,077			9,684			36,073			35,657
Income before income taxes		7,427			31,021			34,808			95,671
Provision for income taxes		2,431			10,453			8,969			30,878
Net income - including noncontrolling interest		4,996			20,568			25,839			64,793
Net income - noncontrolling interest		341			3,681			4,630			15,351
Net income - attributable to Sonic Corp.	$	4,655		$	16,887		$	21,209		$	49,442

Net income per share attributable to Sonic Corp.:
Basic	$	0.08		$	0.28		$	0.35		$	0.81
Diluted	$	0.08		$	0.28		$	0.34		$	0.81
Weighted average shares used in calculation:
Basic		61,627			61,052			61,319			60,761
Diluted		61,706			61,377			61,576			61,238

In accordance with Accounting Standards Codification (ASC) Topic 810, "Consolidation," net income (after tax) attributable to noncontrolling interest, previously referred to as Minority Interest in Earnings of Company-owned Drive-Ins and reported on a pre-tax basis under Costs and Expenses-Company-owned Drive-Ins, is now reported separately from the net income of the controlling interest also on a pre-tax basis. The change in presentation has no effect on the company's reported net income.


SONIC CORP.
Unaudited Supplemental Information


	Fourth Quarter Ended August 31,				Fiscal Year Ended August 31,
	2010		2009		2010		2009
Drive-Ins in Operation:
Company-owned:
Total at beginning of period	458		492		475		684
Opened	1		1		5		11
Acquired from (sold to) franchisees	--		(11	)	(16	)	(205	)
Closed	(4	)	(7	)	(9	)	(15	)
Total at end of period	455		475		455		475

Franchise:
Total at beginning of period	3,112		3,034		3,069		2,791
Opened	24		40		80		130
Acquired from (sold to) company	--		11		16		205
Closed (net of reopening)	(19	)	(16	)	(48	)	(57	)
Total at end of period	3,117		3,069		3,117		3,069

System-wide:
Total at beginning of period	3,570		3,526		3,544		3,475
Opened	25		41		85		141
Closed (net of reopening)	(23	)	(23	)	(57	)	(72	)
Total at end of period	3,572		3,544		3,572		3,544


SONIC CORP.
Unaudited Supplemental Information
($ in thousands)

	Fourth Quarter Ended August 31,						Fiscal Year Ended August 31,
	2010			2009			2010			2009

Sales Analysis
Company-owned drive-ins:
Total sales	$	115,406		$	128,402		$	414,369		$	567,436
Average drive-in sales		251			265			893			954
Change in same-store sales		-6.1	%		-5.3	%		-8.8	%		-6.4	%

Franchise drive-ins:
Total sales	$	910,675		$	951,024		$	3,205,507		$	3,269,930
Average drive-in sales		295			312			1,043			1,122
Change in same-store sales		-6.4	%		-4.4	%		-7.6	%		-3.9	%

System-wide:
Change in total sales		-4.9	%		0.1	%		-5.7	%		0.7	%
Average drive-in sales	$	289		$	305		$	1,023		$	1,093
Change in same-store sales		-6.4	%		-4.5	%		-7.8	%		-4.3	%

Note: Change in same-store sales based on drive-ins open for at least 15 months.


SONIC CORP.
Unaudited Supplemental Information
($ in thousands)

	Fourth Quarter Ended August 31,				Fiscal Year Ended August 31,
	2010		2009		2010			2009

Margin Analysis
(percentage of Company-owned drive-in sales)
Company-owned drive-ins:
Food and packaging	27.6	%	27.6	%		27.6	%		27.6	%
Payroll and employee benefits	35.1	%	32.1	%		35.2	%		32.9	%
Other operating expenses	21.9	%	21.6	%		22.8	%		21.4	%
Cost of sales, as reported	84.6	%	81.3	%		85.6	%		81.9	%

Noncontrolling interest	0.3	%	2.9	%		1.1	%		2.7	%
Pro forma cost of sales, including noncontrolling interest	84.9	%	84.2	%		86.7	%		84.6	%

					Aug. 31, 2010			Aug. 31, 2009

Balance Sheet Data
Current assets					$	133,928		$	202,132
Property, equipment and capital leases, net						489,264			523,938
Total assets						737,320			849,041
Current liabilities, including capital lease obligations and long-term debt due within one year						118,608			117,319
Obligations under capital leases due after one year						32,872			36,516
Long-term debt due after one year						529,872			646,851
Total liabilities						714,755			851,393
Stockholders' equity (deficit)						22,566			(2,352	)