The bottom line – SONC continues to deliver on those initiatives that are within the company’s control. The MACRO environment for QSR remains challenging. The franchise model (SONC refranchised 205 partner drive-ins in fiscal 2009), margin improvement and continued unit growth will allow SONC to rise above the rest over time. As I have said before, SONC’s return on incremental invested capital (ROIIC) has already turned and is becoming less negative. The timing on the improvement in sales trends, however, will be a key driver to short-term sentiment.
Positive and Negative takeaways from the quarter/earnings call…
Positives:
YOY operating margin improvement came in better than my expectations.
Traffic came in about flat (strong relative to peers).
New store openings in new markets are sustaining average unit volumes above the system average (always a strong indicator of future performance).
We should see continued improvement in restaurant margins in FY10 (turning positive despite continued pressure from promotional activity with COGS flat as a % of sales on a full-year basis).
Restaurant –level and operating margins will be benefited by recent refranchising activity.
SONC will continue to generate free cash flow in fiscal 2010, which the company said it will use to generate shareholder value.
Negatives:
Management stated that weather has been a challenge, implying no improvement in sales trends in early fiscal first quarter.
Average check continued to decline in the quarter (so traffic improvement coming at the expense of average check).
Management said there were no changes to guidance provided on Sept 17 but when questioned specifically about flat same-store sales growth guidance, management said it would have to revisit this guidance following the first quarter results.
The current credit environment is delaying franchisee unit openings. The company is offering deferred and reduced franchise fee and royalty requirements to spur new franchisee development, particularly multi-unit development.
