SONC SONIC CORP
Sector financial performance:
This company, who primarily operates (6% of stores) and franchises (94% of stores) drive-in restaurants, has been grouped into burger-quick service restaurants sector in foodservice industry.
It seems that the slowing down traffic was the major reason contributing to slowing down increase in comparable sales of fast-service restaurants between 2015 and 2017. Data indicates that the average increase in comparable sales all across this sector went down from around 5% of 2015 to around 1% of 2017 except the Mexican restaurants, which presents consistent 5-6% increase in comparable sales during this period. (Hamburger-QSR went down from 5% to 1%; chicken-QSR down from 4% to 2%; sandwich-QSR down from 4% to -2%; pizza-QSR down from 4% to 0%). Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015. For example, our data indicates that the average decrease in traffic of hamburger restaurants was 2% and 1% in 2016 and 2017.
Since 2017, it seems that traffic all across this industry has continued to decline but present signals of slowing down. Traffic in Mexican restaurant started to decrease in 2018 following the trend seen frequently in other types of QSR before 2017. Comps turned into negative range and were down largely in Pizza sector in 2018, which, with sandwich companies present the worst decline among QSR sector in the past two years. Comps in chicken related QSR restaurants seem least impacted by generally slowing down in traffic all across industry probably due to relatively stronger demand and thus the ability to raise price. Decreasing Hamburgers’ comps seem to be hitting the bottoms as traffic rebounds and price rises.
It seems that the impacts from decrease in traffic have been offset partially by raising menu price/products mix. This is probably why we are seeing positive growth in their comparable sales from many restaurants while decrease in traffic.
For under-performed companies in this industry, franchising their company-operated restaurants obviously has been a better business strategy in dealing with decreasing sales and cash flow. However, all industry has been suffering from general decline in sales. Data indicates that the average cash flow/share of companies in this sector has been declining since 2017.
Our data indicate that, while slowing down comparable sales, there are general improvements in companies’ gross margins in the past several years benefiting from shifting of revenue to re-franchising, rising menu price, and decreasing commodity costs.
Different types of food styles present different gross margins depending on how easy/difficult they can find franchisees for their restaurant concepts. It seems that chicken-QSR demonstrates the best abilities to franchise their concept and thus present the highest average sector gross margin (average 47%). Hamburger QSR then follows, which presents average 36% gross margin. The typical gross margin for Mexican and pizza QSR is around 17% with a low proportion of franchised revenue. Sandwich sector presents the lowest gross margin of about 13%.
Correspondingly, chicken-QSR presents, according our data, the highest operating margin of average 30% with a SG&A as percentage of sales of 16%. Hamburger-QSR has an average 22% operating margin with a SG&A as percentage of sales of 13%. Mexican and Pizza -QSR has an average 8-9% operating margin with a SG&A as percentage of sales of 8-9%.
It seems that the demand for service/products of this company (including both company and franchise restaurants) has continued to decline since 2014 as indicated by decreasing customers’ traffic number. The downward trend in traffic accelerates in 2017 even though this company lowered the price or increased promotion. Companies continued to re-franchise its owned restaurants. Decline in traffic may still continue in 2018 but in a slower pace as compared with 2017.
For the first nine months of Fiscal 2018 compared with same period of 2017(ended 20180531)
Comparable sales (including company and franchises) decreased 1.5% (-0.2% for 2Q)
Fiscal 2017 compared with 2016(ended 20170831)
Comparable sales (including company and franchises) decreased 3.3% due to decline in traffic and decrease of about 2.7% in check size.
Fiscal 2016 compared with 2015
Comparable sales (including company and franchises) increased 2.6% due to increase of about 3.2% in check size offset by decrease in traffic.
Fiscal 2015 compared with 2014
Comparable sales (including company and franchises) increased 7.3% due to increase of 7.9% in check size.
Its gross margin (including company-operating expenses, commodity, wages and rent) went up from 30% to 41% between 2014 and 2017 as a result of re-franchise of company’s stores. Its SG&A as percentage of sales has been up from about 13% to 17% in 2017 due to deleverage of decreased sales as a result of less company’s stores and its operating margin went up to about 24% in 2017. In 2018, gross margin continued to grow to 42% and SG&A% up to about 18% both due to continuingly re-franchising. It operating margin was still about 24%. Therefore, while improved margins, its cash flow has declined due to decline in same-store sales and re-franchising.
This stock currently has an enterprise price/EBI ratio of 29. We think that its stock is being relatively overvalued compared with its peers.
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