Sonic Corporation (NASDAQ:SONC)’s stock has gained 40% in the last six months. Its differentiated business model and customer centric “made to order” approach have helped it grow in this period. It has shifted its marketing efforts more towards national level advertising to promote its products and brand across the nation. Its new Point of Sales system along with the incremental revenue from license renewals are expected to drive bottom-line growth. It has introduced new products and new menu platforms that are expected to drive comps growth in latter part of the year. Now, let’s discuss these points in detail.
Shift from local to national marketing and promotions will drive sales growth
This new marketing mix along with the return of the “Two Guys” advertisement is expected to gain national visibility and brand recognition for the company. This has helped the company to promote multiple day parts effectively in the new and developing markets by using the same marketing budget.
New Point of Sale system and license conversion will increase bottom-line growth
Sonic Corporation (NASDAQ:SONC) has introduced a new Point of Sale, or POS, system that includes a back office system to detect employee theft, inventory control system and efficient labor scheduling. This POS system is expected to drive margins back to the 15-17% level. The system will be rolled out first in the company-owned restaurants, and later in the complete system during 2014-16.
Meanwhile, Sonic Corporation (NASDAQ:SONC) is awaiting the license conversion and renewal of 850 stores scheduled to take place in 2015. These renewals will take place at higher rates than before and bring incremental revenue in fiscal 2015. Its new POS system and license renewals will drive bottom line growth in the long term.
New product launches and menu platforms are expected to drive same store sales
In the last two years Sonic Corporation (NASDAQ:SONC)’s product development process has improved with increased innovation in the menu. It has added new menu platforms like breakfast and chicken sandwiches. In the third quarter this year, it launched new products such as Spicy Jumbo Popcorn Sandwich, Sweet Potato Tots in afternoon snacks and Molten Lava Cake Sundae for morning and evening.
The company’s pre-announced comparable store sales for the third quarter are below the consensus estimate due to bad weather conditions in March and April. Its sales growth is expected to gain momentum in the latter part of the year with increased national marketing spend.
Peer analysis
In the fast casual burger restaurants segment, the other two major players are The Wendy’s Company (NASDAQ:WEN) and Burger King Worldwide Inc (NYSE:BKW).
The Wendy’s Company (NASDAQ:WEN) is in an image transformation mode under its “Image Activation Program” for the last two years. It has re-imaged 60 stores and will look to complete 100 stores by the end of this year.
It launched its “Right Price, Right Size” menu in the first quarter this year with dual price points. This menu has helped it to serve value conscious customers with more price flexibility. It has also eliminated breakfast from the non-performing markets. These initiatives will help the company to drive sales growth with better margins.
Burger King Worldwide Inc (NYSE:BKW) is transforming its business towards a 100% franchisee model. It completed 97% of the re-franchising by the end of last quarter, and will look to complete it by the end of this fiscal year.
It has launched new products in the value segment like the $1.29 Whooper Junior and 2 for $5 special. It will look to do marketing with more product focused promotions at the national level.
It is re-imaging its stores and has targeted to complete 40% of the stores by the end of the year 2015. Re-imaged stores are lifting the sales up by 10-15% and will drive sales growth in the long term.
| Company | P/S ratio | Op. margin | 1 yr. Forward P/E |
|---|---|---|---|
| Sonic Co. | 1.82 | 10.37% | 18.35 |
| Wendy’s (NASDAQ:WEN) | 0.97 | 3.72% | 26.04 |
| Burger King | 5.51 | 31.25% | 23.02 |
Source: Google Finance and Yahoo Finance
Sonic Corporation (NASDAQ:SONC) has reported an operating margin of 10.37% and the lowest one-year forward P/E of 18.35 among the three mentioned peers. Wendy’s has the lowest P/S operating margin of 3.72, but with the highest forward P/E ratio of 26.04. Burger King has the highest operating margin of 31.25% among the peers, but with the highest P/S ratio of 5.51.
Conclusion
Sonic Corporation has a different business model and it has split its marketing efforts between national and local marketing. It has launched new products with new menu platforms this year. It is expected to increase comparable sales in the future with increased national advertising spend and innovative products. Its new POS system rollout and license renewals will drive bottom-line growth of the company in the long term. So, I recommend a Buy for investors with a long-term horizon.
Ash Sharma has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide.
The article What’s Cooking at Sonic? originally appeared on Fool.com and is written by Ash Sharma.
Ash is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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