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Sonic Same-Store Sales Fall, but Change Afoot

Sonic Corporation [NASDAQ:SONC] announced on Tuesday a rough ride in its second fiscal quarter for the 3,587 hamburger drive-ins that it oversees.

Same-restaurant sales, which are calculated in this chain for stores open for 15 months of operation as opposed to the more typical 18 months that the industry uses, continue to fall for Sonic. Comparable sales versus the same period a year earlier dropped by 2.9 percent in its second fiscal quarter, which ended February 28, 2018. Same-restaurant sales for franchised stores declined by only 2.8 percent compared to a fall of 3.7 percent for Sonic’s company-owned restaurants.

That drop in sales took place against a backdrop in which the company says commodity costs for its restaurants rose by 2.2 percent, while hourly labor inflation grew by 2.6 percent, for the quarter versus the same period a year ago. In other words, Sonic restaurants have had a double whammy of dropped sales and increased expenditures. 

That drop in same-restaurant sales also resulted in royalty revenues and fees that dropped by almost $900,000, or 2.4 percent, for the franchisor.

Sonic leaders blamed the decline in restaurant sales and visits to bad weather this winter and shrewd maneuvering by competitors.

“Our second quarter same-store sales decline reflected unfavorable weather and continued aggressive discounting by the competition,” said Sonic’s CEO Cliff Hudson. Hudson says that the brand continues to use a value strategy that mimics its competitors at a $3.99 and $2.99 price point. “These types of broadly appealing value offerings provide a compelling price point and highlight Sonic’s quality differentiation,” says the CEO.

Sonic slinger classicThere's been change at the Oklahoma-based company. In February Sonic promoted Claudia S. San Pedro to president. She had been the company’s chief financial officer. Another change was in product offerings. Early this month Sonic introduced a signature slinger, the smaller $1.99 burger, to help it compete with McDonald’s $1, $2 and $3 value items and Hardee’s $1, $1.50 and $2 mini burgers. 

As Sonic adds different value price points, the company is trying to reduce the complexity of its menu and simplify kitchen operations. New president San Pedro said to a group of analysts at the company’s earnings conference that the company will follow up recent spring menu reductions with another round in the fall, “focusing on lower velocity items that have a tendency to create bottlenecks in the restaurant.”* She added, “By reducing menu items, we can reduce time spent navigating the menu and push them towards core items that can be prepared efficiently in the kitchen.” 

Sonic president Claudia San PedroSan Pedro pointed out that feedback from the chain’s franchisees was very helpful for simplifying restaurant operations. “I think we're getting great feedback from our franchisees on our efforts to simplify the menu and simplify operations and that also includes simplifying promotional activity,” said Sonic’s president.

In fact there was considerable interest in the health of Sonic’s franchisees, judging by questions from analysts and comments from company officers. Franchisees were mentioned 18 times in the earnings call.

There has been a change in Sonic’s advertising too. This month it expanded its advertising campaign to appeal more to women, featuring actors Jane Krakowski and Ellie Kemper. They are in addition to the company's decade-old lineup of two Sonic-loving guys, improvisational comedians Peter Grosz and T.J. Jagodowski.

Like its competitors, the company is racing to meet the demands of consumers who ubiquitously carry smartphones, shun waiting and have increased expectations that food and products can be delivered. In the midst of this consumer sea change, Sonic is retooling its digital presence. The company rolled out its order-ahead app, which enables customers to place orders and choose a time for pickup.

Those digital changes affect everything from ordering, food preparation and restaurant layout. Sonic is trying to figure out new store layouts and kitchen designs that take advantage of these behavioral changes in consumers. “You'd want to make sure that you're able to take and fill orders in a nonlinear fashion,” said CEO Cliff Hudson in Sonic’s earnings call to analysts, “so as to accommodate multiple simultaneous orders placed either on premises or off premises and do this without stressing your kitchen.” Rethinking labor was also important to reduce the complexity of a kitchen serving inside and outside customers. “You'd want to have a labor model that's set up to take food to customers and/or deliver to the driver curbside,” added Hudson. “We do have several franchisees in several markets that are testing various delivery apps,” said the CEO.

While Sonic expects same-restaurant sales to be flat for 2018, it does anticipate a 1 percent net growth in the number of its restaurants.


*The quotes from the earnings call are available thanks to SeekingAlpha.com and its earnings call transcript.

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