Sonic (SONC) is on the Hedgeye Restaurants Best Ideas list as a LONG.
We will be hosting a live Black Book presentation today, January 24, 2017 at 1:00PM ET to discuss our LONG case for SONC.
CALL DETAILS:
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Confirmation Number: 13653141
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HEDGEYE OPINION
The competition for the value customer is hotly contested, as names such as MCD, QSR, WEN, JACK, and SONC have continued jockeying for position. Originally, we had bet against SONC in this battle, and for that reason we placed the name on our SHORT bench October 2015. However, in April 2016, we pivoted and moved SONC to the LONG bench, as our belief that MCD gaining traction and sales momentum, and subsequently hurting SONC, did not come to fruition as we had hoped.
An already franchise-heavy model, SONC announced on its 3Q16 earnings call its plan to refranchise an additional 140 company-owned drive-ins, which would move the company to a 95% franchised system. Management expressed the intention of using the increased free cash to re-invest in the company, namely in the form of technology and head-count; technology that will drive increased customer loyalty and drastically improve the customer experience through added convenience and personalization. Additionally, investors have started to come around on SONC, as short interest has come off its recent peak in December of 13.4%, but is still elevated at 11.3%.
This is a TAIL duration call, as SONC is not immune to the traffic and labor cost headwinds plaguing the restaurants space. However, the company’s technology initiative will surely set it apart from the rest of the crowd.
We hope you can join us for our call.
OUR KEY POINTS:
DYNAMIC TECHNOLOGY TAKING HOLD
SONC, a trailblazer on the personalized service front, has continued to phase-in its Point of Personalized Service (POPS) digital menus during the past year, now in year three of its four-year rollout. At the end of FY16, approximately two-thirds of system-wide units had implemented this modernized customer interface (now stands at ~71% implementation as of 1Q17), allowing for personalized messaging, store segmentation, data-informed suggestive selling, and dynamic promotions. Additionally, SONC’s planned implementation of Mobile Order & Pay is expected to drive improved customer loyalty and increased convenience, with the end goal of driving increased transactions.
COMPETITIVE PRESSURES ARE FADING…
SONC has been facing a number of headwinds over the last 12-months. First, SONC has not been immune to the general downturn in the restaurants space. Second, the brand has been impacted by a significant increase in the bundled discounting by its larger competitors. Third, the success of MCD’s All-Day Breakfast made life difficult in 2016. As time progresses, these headwinds will become tailwinds, at the same time the company will be putting the finishing touches on its technology initiatives. Longer term, we believe the company could be in the best position of any QSR concept to benefit from mobile technology and other consumer-centric initiatives.
PUSH TO 95% FRANCHISE MODEL & INCREASED FREE CASH FLOW
On their 3Q16 earnings call, SONC management announced its plan to refranchise ~140 company-owned drive-ins, moving the company to a 95% franchised system. Such a move allows SONC to improve efficiency and reduce earnings volatility. Due in part to these actions, free cash flow is projected to increase by 34.3%, from $52 million in FY17 to $70 million in FY18.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
