SONC – Sales accelerating to the Downside

Based on SONC management’s 3Q comments, we knew 4Q partner drive-in same-store sales would be bad, but we did not know they would be this bad. After partner drive-in comparable sales declined 3.9% in 3Q, management forecasted that 4Q same-store sales would be up 2%-4% with partner drive-in performance continuing to be 3%-4% below this range (implies 4Q same-store sales of -2% to +1%). SONC attributed this significantly weaker partner performance to overly aggressive price increases taken last year combined with a decline in customer service as a result of the company’s focus on margin management.

SONC preannounced its 4Q results after the close yesterday and same-store sales came in significantly lower than the already lowered expectations. The company stated 4Q partner drive-in comparable sales “continued to be significantly negative,” resulting in slightly negative system same-store sales. I did not find these results to be that alarming until I did the math and realized how bad these “significantly negative” partner numbers potentially were in 4Q. The press release went on to say that for the full year, franchise drive-in same-store sales came in slightly below the 2%-4% targeted range with partner drive-ins performing 3%-4% below that range (again implies slightly below the -2% to +1% range, but now for FY08 rather than 4Q). Based on partner drive-in performance in the prior three quarters, same-store sales could have declined as much as 9% in 4Q to end the year down 2% (much bigger potential downside relative to management’s prior guidance for 4Q of -2% to +1%). To be clear, for the partner drive-in same-store sales to finish out the year -2% to +1%, 4Q numbers could be anywhere between -9% and +3%. However, the company said numbers were significantly negative, which implies -9% to -3% is the more likely range.