SONIC Results

Sonic Reports Improved Sales Performance for the Fourth Fiscal Quarter of 2018

System same-store sales rose 2.6%, consisting of a 2.6% same-store sales increase at franchise drive-ins and a 2.5% increase at company drive-ins

SONIC

Sonic Corp. (NASDAQ: SONC) yesterday announced results for its fourth fiscal quarter ended August 31, 2018.

Key highlights of the company’s fourth quarter of fiscal year 2018 included:

  • Net income per diluted share increased 2% to $0.51 versus $0.50 in the prior-year period; adjusted net income per diluted share increased 16% to $0.52 versus $0.45 in the prior-year period;
  • System same-store sales rose 2.6%, consisting of a 2.6% same-store sales increase at franchise drive-ins and a 2.5% increase at company drive-ins;
  • Company drive-in margins declined by 80 basis points as compared to the year-ago period;
  • 23 system drive-ins opened; and
  • The company repurchased approximately 890,000 outstanding shares.

Key highlights of the company’s fiscal year 2018 included:

  • Net income per diluted share increased 29% to $1.87 versus $1.45 in the prior-year; adjusted net income per diluted share increased 19% to $1.49 versus $1.25 in the prior-year;
  • System same-store sales declined 0.3%, consisting of a 0.3% same-store sales decrease at franchise drive-ins and a 0.8% decrease at company drive-ins;
  • Company drive-in margins were flat compared to the prior year;
  • 41 system drive-ins opened; and
  • The company repurchased 5.2 million outstanding shares.

“I am proud of the progress we made over the course of fiscal 2018, culminating in solid same-store sales performance in the fiscal fourth quarter. I thank our operators for their sustained efforts to offer the most personalized experience in the quick service restaurant industry and their confidence in underwriting a strong future for the brand through investments in drive-ins, people and technology, as well as their dedication to their employees and communities,” said Cliff Hudson, Sonic Corp. CEO. “Over the past year, our team implemented initiatives to enhance our marketing reach, refresh our advertising, introduce exciting new product news and complete the rollout of mobile Order Ahead to the entire system. The future is bright for the Sonic brand.”

During fiscal year 2018, the company repurchased 5.2 million shares of its common stock for $139.2 million, representing 12% of shares outstanding, and made aggregate dividend payments of $24 million. The company ended the fiscal year with a 4.7x net-debt-to-EBITDA leverage ratio based on $144.8 million of EBITDA for the fiscal year.

Financial Overview

For the fourth fiscal quarter of 2018, the company’s net income totaled $18.6 million or $0.51 per diluted share compared to net income of $20.8 million or $0.50 per diluted share in the same period of the prior year. Excluding the items outlined below, net income was flat and net income per diluted share increased 16% to $0.52. The lower tax rate resulting from federal tax reform benefitted adjusted earnings per share by approximately $0.05. Excluding the total impact of federal tax reform, adjusted net income per diluted share improved 4% to $0.47 in the fourth quarter of fiscal year 2018.

 

(In thousands, except per share amounts)

 
    Three months ended   Three months ended  

 

 

 

 

August 31, 2018

August 31, 2017

 

Net   Diluted

Net   Diluted

Net Income

Diluted EPS
 

Income

EPS

Income

EPS

$ Change

% Change

$ Change

% Change
Reported – GAAP

$ 18,592

$ 0.51

$ 20,831

$ 0.50

$ (2,239 )

(11 )%

$ 0.01

2 %
Payment card breach expense (1)

468

0.01

Tax impact on payment card breach expense (2)

(137 )

0.00

Net gain on refranchising transactions (3)

(113 )

0.00

Tax impact on refranchising transactions (5)

41

0.00

Restructuring charges (4)

1,819

0.04

Tax impact of restructuring charges (5)

(672 )

(0.02 )

Gain on sale of real estate

(4,702 )

(0.11 )

Tax impact on real estate sale (5)

 

 

1,738  

0.04  

 

 

 

 
Adjusted - Non-GAAP

$ 18,923  

$ 0.52  

$ 18,942  

$ 0.45  

$ (19 )

%

$ 0.07  

16 %

 

________________

(1)   Costs include legal fees.
(2)

Tax impact during the period at a consolidated blended statutory tax rate of 29.3%.
(3)

Includes amortization of the deferred gain recorded for a refranchising transaction that occurred in the second fiscal quarter of 2017.
(4)

During the fourth quarter of fiscal year 2017 the company incurred severance costs related to the elimination of certain corporate positions.
(5)

Tax impact during the period at an adjusted effective tax rate of 37.0%.

 

For fiscal year 2018, the company’s net income totaled $71.2 million or $1.87 per diluted share compared to net income of $63.7 million or $1.45 per diluted share for the prior year. Excluding the items outlined below, net income increased 3% and net income per diluted share increased 19% to $1.49. The lower tax rate resulting from federal tax reform benefitted adjusted earnings per share by approximately $0.15. Excluding the total impact of federal tax reform, adjusted net income per diluted share improved 7% to $1.34 in fiscal year 2018.

 

(In thousands, except per share amounts)

 
    Fiscal year ended   Fiscal year ended  

 

 

 

 

August 31, 2018

August 31, 2017

 

Net   Diluted

Net   Diluted

Net Income

Diluted EPS
 

Income

EPS

Income

EPS

$ Change

% Change

$ Change

% Change
Reported – GAAP

$ 71,205

$ 1.87

$ 63,663

$ 1.45

$ 7,542

12 %

$ 0.42

29 %
Payment card breach expense (1)

1,676

0.04

Tax impact on payment card breach expense (2)

(548 )

(0.01 )

Loss from debt transaction (3)

1,310

0.03

Tax impact on debt transaction (4)

(384 )

(0.01 )

Discrete impact of the Tax Cuts and Jobs Act

(14,120 )

(0.37 )

Net gain on refranchising transactions (5)

(3,153 )

(0.08 )

(6,758 )

(0.15 )

Tax impact on refranchising transactions (6)

924

0.02

2,542

0.06

Gain on sale of investment in refranchised drive-in operations (7)

(3,795 )

(0.09 )

Tax impact on sale of investment in refranchised drive-in operations (8)

1,350

0.03

Restructuring charges (9)

1,819

0.04

Tax impact of restructuring charges (10)

(672 )

(0.02 )

Gain on sale of real estate

(4,702 )

(0.11 )

Tax impact on real estate sale (10)

 

 

1,738  

0.04  

 

 

 

 
Adjusted - Non-GAAP

$ 56,910  

$ 1.49  

$ 55,185  

$ 1.25  

$ 1,725  

3 %

$ 0.24  

19 %

 

________________

(1)   Costs include legal fees, investigative fees and costs related to customer response.

(2)

Combined tax impact at consolidated blended statutory tax rates of 38.2% during the first quarter of fiscal year 2018 and 29.3% during the second, third and fourth quarters of fiscal year 2018.

(3)

Includes a $0.7 million write-off of unamortized deferred loan fees related to the reduction of the company's variable funding note commitments, as well as a $0.4 million write-off of unamortized deferred loan fees related to the prepayment on the company's 2013 and 2016 fixed rate notes. Additionally, as required by the terms of the 2016 fixed rate notes, we paid a $0.2 million prepayment premium.

(4)

Tax impact during the period at a consolidated blended statutory tax rate of 29.3%.

(5)

During the third quarter of fiscal year 2018, we completed transactions to refranchise the operations of 41 company drive-ins. During the first and second quarters of fiscal year 2017, we completed transactions to refranchise the operations of 110 company drive-ins. In one of the transactions, a portion of the proceeds was applied as the initial payment for an option to purchase the real estate within the next 24 months. The franchisee initiated exercise of a portion of the option during the third quarter of fiscal year 2017. Until the option was fully exercised, the franchisee made monthly lease payments which were included in other operating income, net of sub-lease expense. In another transaction, we recorded a deferred gain as a result of a real estate purchase option extended to the franchisee. The deferred gain is being amortized into income through January 2020 when the option becomes exercisable. During the third quarter of fiscal year 2017, we also made adjustments to the retained minority investment related to the refranchising transactions that occurred in the first six months of the fiscal year.

 

(6)

Tax impact at a consolidated blended statutory tax rate of 29.3% during fiscal year 2018; a combined tax impact at an effective tax rate of 35.6% during the first quarter of fiscal year 2017 and at adjusted effective tax rates of 36.0%, 48.7% and 37.0% during the second, third and fourth quarters of fiscal year 2017, respectively.

(7)

We recorded a gain related to minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009.

(8)

Tax impact during the period at an adjusted effective tax rate of 35.6%.

(9)

During the fourth quarter of fiscal year 2017 the company incurred severance costs related to the elimination of certain corporate positions.

(10)

Tax impact during the period at an adjusted effective tax rate of 37.0%.

 

Agreement to be Acquired by Inspire Brands

On September 25, 2018, Sonic and Inspire Brands, Inc. (“Inspire”) announced that they have entered into a definitive merger agreement under which Inspire will acquire Sonic for $43.50 per share in cash in a transaction valued at approximately $2.3 billion including the assumption of Sonic’s debt.

Inspire is a multi-brand restaurant company whose portfolio includes more than 4,700 Arby’s, Buffalo Wild Wings, and Rusty Taco locations worldwide. Following the completion of the transaction, Sonic will be a privately held subsidiary of Inspire and will continue to be operated as an independent brand.

In light of the pending transaction with Inspire, Sonic will not host a conference call to discuss its fourth fiscal quarter earnings results.

About Sonic

SONIC, America's Drive-In is the nation's largest drive-in restaurant chain serving approximately 3 million customers every day. Ninety-five percent of SONIC's approximately 3,600 drive-in locations are owned and operated by local business men and women.

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

Three months ended

August 31,

 

Fiscal year ended

August 31,

 

2018   2017

2018   2017
Revenues:

Company Drive-In sales

$ 58,505

$ 72,601

$ 240,722

$ 296,101

Franchise Drive-Ins:

Franchise royalties and fees

49,677

47,840

172,443

170,527

Lease revenue

2,516

1,962

7,804

7,436

Other

1,056  

1,165  

2,621  

3,203  
Total revenues

111,754

123,568

423,590

477,267

 

Costs and expenses:

Company Drive-Ins:

Food and packaging

15,720

19,859

66,583

80,971

Payroll and other employee benefits

20,683

24,789

88,008

107,477

Other operating expenses, exclusive of depreciation and amortization included below

11,283  

13,923  

48,586  

61,463  
Total cost of Company Drive-In sales

47,686

58,571

203,177

249,911

 

Selling, general and administrative

22,344

19,874

80,077

78,687

Depreciation and amortization

9,863

9,717

38,355

39,248

Provision for impairment of long-lived assets

178

148

664

1,140

Other operating income, net

(97 )

(2,897 )

(5,086 )

(14,994 )
Total costs and expenses

79,974  

85,413  

317,187  

353,992  
Income from operations

31,780

38,155

106,403

123,275

 

Interest expense

8,647

7,472

33,058

29,206

Interest income

(543 )

(351 )

(1,904 )

(1,398 )
Loss from debt transactions

 

 

1,310  

 
Net interest expense

8,104  

7,121  

32,464  

27,808  

 
Income before income taxes

23,676

31,034

73,939

95,467

Provision for income taxes

5,084  

10,203  

2,734  

31,804  
Net income

$ 18,592  

$ 20,831  

$ 71,205  

$ 63,663  
 

Basic income per share

$ 0.52  

$ 0.50  

$ 1.89  

$ 1.47  
Diluted income per share

$ 0.51  

$ 0.50  

$ 1.87  

$ 1.45  
 

Weighted average basic shares

35,938  

41,309  

37,618  

43,306  
Weighted average diluted shares

36,445  

41,985  

38,086  

44,043  

 
 
SONIC CORP.
Unaudited Supplemental Information
 

 

Three months ended

August 31,

 

Fiscal year ended

August 31,

2018   2017

2018   2017
Drive-Ins in Operation:

Company:

Total at beginning of period

179

230

228

345

Opened

3

Sold to franchisees

(2 )

(49 )

(117 )
Closed (net of re-openings)

 

 

 

(3 )
Total at end of period

179  

228  

179  

228  
Franchise:

Total at beginning of period

3,410

3,341

3,365

3,212

Opened

23

27

41

63

Acquired from the company

2

49

117

Closed (net of re-openings)

(6 )

(5 )

(28 )

(27 )
Total at end of period

3,427  

3,365  

3,427  

3,365  
System:

Total at beginning of period

3,589

3,571

3,593

3,557

Opened

23

27

41

66

Closed (net of re-openings)

(6 )

(5 )

(28 )

(30 )
Total at end of period

3,606  

3,593  

3,606  

3,593  

 

 

 

 

Three months ended

August 31,

Fiscal year ended

August 31,

 

2018   2017

2018   2017

($ in thousands)
Sales Analysis:

Company Drive-Ins:

Total sales

$ 58,505

$ 72,601

$ 240,722

$ 296,101

Average drive-in sales

329

316

1,155

1,134

Change in same-store sales

2.5 %

(4.8 )%

(0.8 )%

(4.7 )%
Franchised Drive-Ins:

Total sales

$ 1,195,076

$ 1,136,856

$ 4,205,782

$ 4,112,062

Average drive-in sales

354

344

1,260

1,260

Change in same-store sales

2.6 %

(3.2 )%

(0.3 )%

(3.2 )%
System:

Change in total sales

3.6 %

(2.2 )%

0.9 %

(2.4 )%
Average drive-in sales

$ 353

$ 342

$ 1,253

$ 1,250

Change in same-store sales

2.6 %

(3.3 )%

(0.3 )%

(3.3 )%

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

 
SONIC CORP.
Unaudited Supplemental Information
 

Three months ended

August 31,

 

Fiscal year ended

August 31,

 

2018   2017

2018   2017
 

(In thousands)
Revenues:

Company Drive-In sales

$ 58,505

$ 72,601

$ 240,722

$ 296,101
Franchise Drive-Ins:

Franchise royalties

49,204

47,434

171,489

169,344
Franchise fees

472

406

954

1,183
Lease revenue

2,516

1,962

7,804

7,436
Other

1,056  

1,165  

2,621  

3,203
Total revenues

$ 111,754  

$ 123,568  

$ 423,590  

$ 477,267

 

 

 

 

Three months ended

August 31,

Fiscal year ended

August 31,

 

2018   2017

2018   2017
Margin Analysis (percentage of Company Drive-In sales):

Company Drive-Ins:

Food and packaging

26.9 %

27.4 %

27.7 %

27.3 %
Payroll and employee benefits

35.3

34.1

36.5

36.3

Other operating expenses

19.3  

19.2  

20.2  

20.8  
Cost of Company Drive-In sales

81.5 %

80.7 %

84.4 %

84.4 %

 

 

 

 

August 31,

August 31,
 

2018

2017
 

(In thousands)
Selected Balance Sheet Data:

Cash and cash equivalents

$ 39,835

$ 22,340

Current assets

104,429

89,184

Property, equipment and capital leases, net

298,222

312,380

Total assets

$ 531,134

$ 561,744

 

Current liabilities, including capital lease obligations and long-term debt due within one year

$ 62,079

$ 58,616

Obligations under capital leases due after one year

13,003

16,167

Long-term debt due after one year, net of debt issuance costs

701,478

628,116

Total liabilities

819,980

763,502

Stockholders' deficit

$ (288,846 )

$ (201,758 )

 

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 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.

 

 

Three months ended

August 31, 2018

Three months ended

August 31, 2017

 

Reported

GAAP

  Adjustments  

Adjusted

Non-

GAAP

Reported

GAAP

  Adjustments  

Adjusted

Non-

GAAP

(In thousands)
Total Revenues

$ 111,754

$

$ 111,754

$ 123,568

$

$ 123,568

 
Total cost of Company Drive-in sales

47,686

47,686

58,571

58,571
Selling, general and administrative

22,344

(468 ) (1)

21,876

19,874

19,874
Depreciation and amortization

9,863

9,863

9,717

9,717
Provision for impairment of long-lived assets

178

178

148

148
Other operating income, net

(97 )

 

(97 )

(2,897 )

2,996   (2)

99
Total cost and expenses

79,974  

(468 )

79,506  

85,413  

2,996  

88,409
Income from Operations

$ 31,780  

$ 468  

$ 32,248  

$ 38,155  

$ (2,996 )

$ 35,159

 

________________

(1)   Payment card breach expenses recorded in the fourth quarter of fiscal year 2018.
(2)

Includes the $113 thousand pretax net gain on refranchising transactions, the $1,819 thousand pretax severance costs related to the elimination of certain corporate positions and the $4,702 pretax gain on real estate recorded in the fourth quarter of fiscal year 2017.

 

 

 

Fiscal year ended

August 31, 2018

Fiscal year ended

August 31, 2017

 

Reported

GAAP

  Adjustments  

Adjusted

Non-

GAAP

Reported

GAAP

  Adjustments  

Adjusted

Non-

GAAP

(In thousands)
Total Revenues

$ 423,590

$

$ 423,590

$ 477,267

$

$ 477,267

 
Total cost of Company Drive-in sales

203,177

203,177

249,911

249,911

Selling, general and administrative

80,077

(1,676 ) (1)

78,401

78,687

78,687

Depreciation and amortization

38,355

38,355

39,248

39,248

Provision for impairment of long-lived assets

664

664

1,140

1,140

Other operating income, net

(5,086 )

3,153   (2)

(1,933 )

(14,994 )

13,436   (3)

(1,558 )
Total cost and expenses

317,187  

1,477  

318,664  

353,992  

13,436  

367,428  
Income from Operations

$ 106,403  

$ (1,477 )

$ 104,926  

$ 123,275  

$ (13,436 )

$ 109,839  

________________

(1)   Payment card breach expenses recorded in fiscal year 2018.
(2)

Includes the pretax gain on refranchising transactions recorded in fiscal year 2018.
(3)

Includes the $6,758 thousand pretax net gain on refranchising transactions during fiscal year 2017, the $3,795 thousand pretax gain on the sale of investment in refranchised drive-in operations during the first quarter of fiscal year 2017 and the $1,819 thousand pretax severance costs related to the elimination of certain corporate positions and $4,702 pretax gain on real estate recorded in the fourth quarter of fiscal year 2017.



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