Sonic Earnings Call Insights: Double-Digit Comps, Promotions

On Wednesday, Sonic Corporation (NASDAQ:SONC) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and executives.

Double-Digit Comps

Jeffrey Bernstein – Barclays Capital: Two questions, just first on the comp side of things, well, I guess, two parts to this question, but you talked about I guess this fourth quarter kind of being in that low single-digit range, which is probably similar to what we saw in the third quarter. I know, the compare of these 400 or so basis points, I’m just wondering if perhaps that’s conservative or perhaps there are some unusual benefits in the third quarter that are not likely to recur and it sounds like you’re fairly bullish, there is no mention of caution in the current macro environment or whatnot, so just wondering your thoughts near term as it relates to comps and then I had a follow-up.

J. Clifford Hudson – Chairman and CEO: I think, Jeffery, we have stated fairly clearly that it’s our objective to deliver the low-to-moderate single-store, single-digit same-store sales, and by doing that with our business model as it is we can deliver double-digit comps. There are many challenges to our business ongoing from a competitive standpoint, from a customer, consumer standpoint. So what happens over time, much more fluid than is ever seen before the recession. There is from our standpoint no upside to talking about that beyond that, and we can believe – we believe we can deliver that, and we’re working to deliver that and you will get the benefit of that as we do.

Jeffrey Bernstein – Barclays Capital: But there doesn’t seem to be any sign of or anything you can see in terms of macro having a negative impact there, perhaps an increase in competitive discounting or promotional activity?

J. Clifford Hudson – Chairman and CEO: Well, the macro elements that we see, you see, so there’s not something about consumer behavior that we’re able to observe that the marketplace doesn’t observe, and all of our competitors don’t observe. As it relates to increased promotional activity, it probably will increase over time, but it’s gotten whether it’s food quality, pricing strategy, multiple products across multiple day parts going after our drink business et cetera, it’s a pretty intense environment and I expect it will continue to be so.

Jeffrey Bernstein – Barclays Capital: Then just a follow-up question was related to the franchisees, potentially reaccelerating their unit growth, I know in the past you’ve talked about 18 plus months or so once comps start to improve. It sounds like comps did now improve for the past few quarters, so I think you changed the tone to be just over the next few quarters you could see a reacceleration. I’m just wondering obviously with lower investment cost as well helping. You are already seeing the demand for that and people are starting to get the real estate and get permits and you would expect that uptick over the next few quarters and what kind of pace of growth should we assume starting a few quarters from now once the franchisees have the ability to restock the pipeline?

J. Clifford Hudson – Chairman and CEO: Well, I think our franchisee is confidence in the business is certainly increasing as sales and profits are increasing and I think smaller building gets increased confidence so that they can get an ROI whether – but I don’t expect over the next you will see that manifest itself in the store openings over the next two quarters. I mean it does take considerable time to go out, find real estate, go through the permitting process, that can be a very extended period of time depending on the markets that we are talking about, but in general our franchisee’s confidence in the business is good and their prospect for ROI are getting better with the smaller building, so that that argues for strong development in the future. I can’t pinpoint exactly when that will be however.

Jeffrey Bernstein – Barclays Capital: But you would expect the meaningful uptick in terms of growth maybe a year or two out from now.

J. Clifford Hudson – Chairman and CEO: Well this is an area we have focused on and as Scott had mentioned we are focused on it from the standpoint of reengineering some elements of the building driving costs out, creating opportunities that sooner that wouldn’t be there otherwise. We also have some new talent onboard that is focusing in this area and so this is an area in which we are focusing attention to yield results sooner than we might have the way we are looking at it 12-months ago. But that does not mean sores are coming out of the ground at a greater rate, it will take time for that to occur. This is an area we are focusing on and putting a different kind of resource against it versus 12 months given the improvement in the business.

Promotions

Brian Bittner – Oppenheimer: Just given that it is a real intense environment out there and given that your business is heavily driven by these excessive promotions and will likely continue to be. Can you just dive a bit deeper into your high confidence level here for a sustainable turn towards positive comps, pass the fourth quarter. May be talk about how deep that pipeline for promotional activity is how far it is planned out and maybe add some color on why you do expect it to be successful.

J. Clifford Hudson – Chairman and CEO: Well one of the things that I made reference to and I think maybe Steve made reference to in his comments as well. We have made investments in people inside and outside the company in the last year and more. Beyond where we have been prior that time. Some of those are incremental positions. Some of it is shift in talent. I can say that the internal processes for the product pipeline have improved in the last year and both the strategic focus as well as the level of activity and the quantity and pipeline in this stepped up testing all have improved over the last number of months, so with that tied to having greater confidence and moving toward, as we had prior recession multi day part promotional activity, and having a creative format, i.e., the two guys, that really permits us to do that in a three month period, meaning a quarter, in other words really as recently as last fall and summer, with new – attempts at new creative, we were elongating promotions simply to get awareness of a specific commercial and/or type of campaign, by going back to the two guys and now I should say moving forward with the two guys, we have that immediate recognition and the ability to integrate that campaign, the two guys across multiple day parts, and so run a greater variety of commercials in a shorter period of time, because they’re all introduced with the two guys, with the pipeline improving, product development, products across multiple day parts, so I don’t know that there’s a way to quantify it for you, and any tip too would require us to good into day part strategy and product pipeline, and I really wouldn’t even care to go into for confidential promotional activity purposes.

Brian Bittner – Oppenheimer: No, that makes sense, and I appreciate that. And then the last question would be on the potential increase in the royalty rate, because I do believe, if you do have a sustainable turn in positive same store sales, that is a compelling part of the story, and I know that you guys alluded to the reasons why it hasn’t increased yet, but is there any additional color you can give, so we can maybe understand a little bit more when that could potentially turn. Maybe additional color on how many stores are getting breaks right now, or anything you can give us to help us better understand the dynamics behind when that royalty rate could potentially turn?

J. Clifford Hudson – Chairman and CEO: Well, we did a couple different things. Number one, we offered some development incentive, and then we had some relief that was associated with some of our more challenged markets, and we did get some benefit from those incentives in terms of development that would never have occurred otherwise and some of those challenged markets it really helped them and they are now performing much better. Those are going to continue to be a play for a while, but I think as we continue to drive positive same-store sales, we will see our royalties grow, the nominal amount of royalty income will grow every quarter and the royalty rate should pick-up over time, particularly in 2014 when we have about 900 license agreement that are scheduled to convert to a higher rate beginning then, so that will be another factor that causes the royalty rates to go up.