Executives
J. Clifford Hudson - Chairman and Chief Executive Officer
Stephen C. Vaughan - Chief Financial Officer and Executive Vice President
W. Scott McLain - President and President of Sonic Industries Services Inc
Claudia San Pedro - Vice President of Investor Relations and Treasurer
Analysts
Keith Siegner - Crédit Suisse AG, Research Division
Peter Saleh - Telsey Advisory Group LLC
Nicole Miller Regan - Piper Jaffray Companies, Research Division
Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division
John S. Glass - Morgan Stanley, Research Division
Sharon Zackfia - William Blair & Company L.L.C., Research Division
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
Brad Ludington - KeyBanc Capital Markets Inc., Research Division
Jeffrey Andrew Bernstein - Barclays Capital, Research Division
Joseph T. Buckley - BofA Merrill Lynch, Research Division
Michael W. Gallo - CL King & Associates, Inc.
Will Slabaugh - Stephens Inc., Research Division
Matthew J. DiFrisco - Oppenheimer & Co. Inc., Research Division
Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division
Sonic (SONC) Q4 2011 Earnings Call October 18, 2011 5:00 PM ET
Operator
Hello. Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Sonic Corp. Fourth Quarter and Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] .
As a reminder, today's call is being recorded. I would now like to turn the conference over to Ms. Claudia San Pedro, Vice President of Investor Relations and Treasurer. Please go ahead, Ms. San Pedro.
Claudia San Pedro
Good afternoon, everyone. We are pleased to host this conference call regarding results issued this afternoon for the fourth quarter of fiscal year 2011, which ended on August 31, 2011.
Before we begin, I would like to remind everyone that comments made during this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act 1995 and are subject to uncertainties and risks. It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this afternoon, in the company's annual report on Form 10-K, quarterly reports on Form 10-Q and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.
Lastly, I would like to point out that remarks made during this conference call are based on time-sensitive information that is accurate only as of today's date, October 18, 2011. For this reason and as a matter of policy, Sonic limits the archived replay of this conference call webcast to a period of 30 days. This call is a property of Sonic Corp. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the expressed written consent of the company is prohibited.
Finally, we have scheduled this call, which includes the Q&A portion, to last 1 hour. If we have not gotten to your question within that 1 hour time slot, please contact me at area code (405) 225-4846, and we'll make the appropriate arrangements to answer your question.
With those announcements, I'll turn the call over to Cliff Hudson, the company's Chairman and Chief Executive Officer.
J. Clifford Hudson
Thank you, Claudia, and good afternoon, everyone. We appreciate you joining us today for our conference call for our fiscal year-end and our fourth quarter -- fiscal quarter 2011.
So we're pleased to report that we ended the fiscal year with positive same-store sales, 1.8%, as you now know, for company drive-ins and 0.5% up for the systems. This represents a nice and even significant reversal of the trends when compared to our fiscal 2010 results. And while our fiscal fourth quarter was somewhat challenging, we continue to believe we're on the right track in the near-term and long-term perspective. We'll talk more about that today.
As many of you know, we put into place a number of new initiatives over the past couple of years, which we believe have strengthened our overall business and really set the foundation for sustained success. These initiatives, which have been focused on improved food and service, were designed in the first place to highlight the differentiated nature of Sonic brand and allow for improved performance in both favorable and challenging economic times from our viewpoint.
So while there's still a lot of room for improvement, we believe that the overall effect of these initiatives benefited our fiscal year 2011 results, evidenced by some of those things we've already talked about: positive same-store sales for the quarter; a 3% increase in the company drive-in average unit volumes; and a 10% increase in the company's adjusted earnings per share for the fiscal year.
So I want to talk a minute about the value equation that you have seen historically. It is the cornerstone, from our viewpoint, of our sales-driving initiatives that have been centered around improving this value equation for our customer. With the equation you see here, you know at this point that our focus has been on the numerator in the last year and more. This includes providing consistent and high-quality customer service experience with high-quality distinctive products.
We've focused -- we've been focused on these 2 areas of our business to varying degrees during the past 3 years, really, and we see the marked improvement in our customers' perceptions of our service, the value we offer and overall customer satisfaction. The progress really has been disproportionately led by our company drive-ins, which is something we would have hoped and expected because of the greater deterioration they'd experienced in the earlier part of the recession. So it's important because with improving company performance at drive-in sales -- company drive-in sales, we get the margins, that are really disproportionate, benefit for us in the near-term opportunity to positively impact growth and earnings for the company.
Secondly, during the last 18 months, we've made significant improvements in the quality of our core menu items, with an emphasis on building entree depth, as well as focusing on Fountain and Frozen Favorites. Some of our product quality initiatives have revolved around the introduction of new products, such as pure beef hotdogs. You've seen this roll out this past fiscal year and emphasized by our recent limited time offers of Kickin' Coney, which is what we're promoting right now.
Kickin' Coney and Bacon & Blue hotdogs.
In other cases, we've upgraded the quality of our longtime favorites, including Real Ice Cream that we upgraded the year before and a new improved footlong quarter-pound chili cheese Coney. All in all, we've improved product categories in our menu representing over 50% of the sales, and we'll continue to look for opportunities to provide best-in-class products that are high quality, distinctive and have a unique value proposition for us to our customers.
Historically, when we promoted an item, we found that we would see sales growth about across multiple day parts. But during this recessionary environment, that's really not been the case. The item we promoted grow sales really for that respective day parts that it's aligned with, but it has not grown sales across multiple day parts most of the time and the individual promotion has not.
We believe we're working toward a good methodology and a strategy to effectively use promotions and media to grow multiple day parts in what is a more challenging environment to pull this off. Many of you know that we have, over the years, grown multiple day parts so that we have business distributed across 5 day parts: breakfast, lunch, afternoon, dinner and evening. So it's been a challenge for us with this change in the economy to use the resources we have: dollars for advertising, menu items, new product news, to be able to move business across these multiple day parts because of what I referred to earlier and that is prerecession, one promotion really driving business generally.
Now, that promotion drives that product in the related day part but not generally. And so for our competitors that just have 2 day parts to drive, the majority -- the significant majority of their business are surrounding or involved with lunch and dinner. It's a different challenge for them driving same-store sales versus this 5-day part structure that we have built over the years. Our belief is we are coming closer to be able to move that effectively with some of the initiatives in the recent past, and we'll continue to focus on that.
As it relates to our sales-driving initiatives, we have with a stronger emphasis on service and product quality in place. We've increased our emphasis on engaging customers more effectively from our viewpoint. During the past year, we established to assist with this a portfolio of partners to enhance all aspects of our marketing program, both on- and off-line, and optimize our media resources. We still have a lot of work to do with them and with our business generally, but we remain confident in the direction of the business and believe that the combination of this improved service, products and customer engagement has given us renewed ability to adapt to this more challenging consumer environment.
So as the fourth quarter, our fourth fiscal quarter demonstrated the external environment we are confronting remains volatile and can lead to swings in consumer confidence in surprisingly short period of times, at a time. As we shared with you last quarter, beginning in May and continuing into June, it became apparent that our promotional schedule is not on target, though we are able to refine our creative content and over time, our promotional strategy to better emphasize the value of multiple day parts. And as a result, we did see sales improve later in the summer and turn modestly positive since mid-August when the refinements of our promotional strategy were more fully implemented.
Now, as we look at fiscal 2012, we'll be focusing on sustaining the positive same-store sales that we have experienced in the more recent past, as you would expect, focusing on quality differentiated promotions and efforts for best-in-class service. We will also increase company drive-in average unit volumes disproportionate to the system we believe, and then use our cash, excess cash, effectively with a share repurchase program we announced last week.
In our view, these components are expected or you can expect them to result in a more solid earnings growth in fiscal 2012. As we go forward, we believe that promoting quality differentiated products and effectively using our media can grow multiple day parts, which enable us to sustain the positive same-store sales we are experiencing, sustain those into fiscal 2012. At the same time, given the uncertainty that persists from a macroeconomic standpoint, we believe it's wise to expect that our results will not necessarily be linear. We'll continue to refine our initiatives and adapt them to what has become an ever-changing consumer environment.
With our business in a better position to adjust to these external pressures, we look to drive consistent sales growth, which in turn should drive the remaining elements or the historical drivers of our multilayered growth strategy, such as our ascending royalty rate, gaining operating leverage for our company at the drive-in level, return on -- improve return on capital and over time, drive in development, to contribute meaningfully to our long-term growth. Each of these components has been integral to our history of double-digit earnings growth and remain very relevant to driving meaningful earnings growth in years to come.
So with that, I'll turn it over to Scott McLain, who's going to update you on the franchising revenues and developments. Scott?
W. Scott McLain
Thank you, Cliff. Our core franchise business remains solid, as evidenced by a $1.7 million increase in franchise royalties for the year. We did see a slight decline in our average royalty rate, as a result of some of the development incentives we've offered over the past 2 years, as well as our efforts to assist some of our more challenged markets.
While these incentives have constrained the growth in our royalty rates, they've helped us sustain development and stabilize performance in certain markets. These efforts will continue to be at play during the coming year, which will likely keep the average royalty rate relatively flat depending upon the degree to which our same-store sales are positive. However, over the longer term, we would continue to expect our ascending royalty rate to produce incremental royalty income as volumes continue to grow. Our franchisees opened 14 new drive-ins during the quarter, and for the year, we opened 40 new franchise drive-ins. We also completed 11 relocations and ended the year with 3,561 total drive-ins in 43 states.
Despite modest same-store sales growth and record pressure on commodity costs, our drive-in level profits grew by roughly $5,600 per drive-in during the fiscal year. We believe this improvement has served to increase our franchisees' overall confidence in the business, which is the single biggest factor in their willingness to continue investing capital. We did close 12 drive-ins during the fourth quarter and 47 during the year, as we continue to actively evaluate our lower volume drive-ins.
Looking ahead, we expect the magnitude of future closings to be consistent with what we've seen over the last couple of years. We believe our 1.3% rate of closings remains relatively modest given the tenuous current economic environment and the fact that we're a 57-year-old brand with more than 3,500 stores.
Despite the challenges we've faced, there's no doubt that our franchisees continue to believe strongly in the Sonic brand. This was fully evident at our most recent national convention held last month, where attendance was up from the prior year and our franchisees were as engaged and passionate about the business as ever. We still have a long runway for growth ahead, and we fully expect the continued improvement in sales and profits will translate into a renewed emphasis on new drive-in development.
However, as we've noted, given the 12- to 24-month development cycle, it will likely be several quarters before we begin seeing a marked increase in new drive-in openings and for the development portion of our multilayer growth strategy to become a major factor in our earnings growth.
Now, I'll turn the call over to Steve Vaughan, our Chief Financial Officer, for some more detail on the financial results.
Stephen C. Vaughan
Thank you, Scott. For the fourth quarter, we reported earnings per share of $0.20 compared to $0.23 in fiscal 2010, excluding impairment charges. For the year, we reported adjusted earnings per share of $0.53 compared to $0.48 in fiscal 2010, an increase of 10% excluding special items detailed in our press release. Despite the challenging fourth quarter results, we were pleased that fiscal 2011 operating income margins improved 50 basis points to 15.3% from 14.8% in fiscal 2010, as a result of the flow-through from increased franchising revenue.
During FY 2011, we faced higher-than-anticipated commodity costs and a full year of our revised manager compensation program. Despite these headwinds, we were pleased to achieve flat overall restaurant operating margins. We believe the implementation of our new compensation program will pay long-term dividends, as we have already seen manager turnover cut in half versus 2 years ago. As we have done previously, in order to compare overall restaurant operating margins on an apples-to-apples basis, we combine the noncontrolling interest volume with Company-owned Drive-In cost of sales.
Looking at each individual line item. Food and packaging costs were unfavorable by 50 basis points for the fiscal year and 60 basis points for the fourth quarter. Beef and ice cream were the primary cost drivers in the fourth quarter. We had approximately 2% of pricing during the quarter, as a result of a 1.5% increase implemented at Company-owned Drive-Ins around the 1st of April, combined with a small increase in prices taken when our new menus were rolled out in June. We'll take a small price increase this fall that will keep our cumulative pricing at approximately 2% as we lap over a very modest price increase last fall. A lot of the inflation will continue to pressure margins, particularly in the first half of the fiscal year. In the first quarter, we are projecting unfavorable costs of 75 to 100 basis points net of pricing.
Our beef contract renews in January, so our visibility into the second quarter is a bit limited. However, we do anticipate the cost pressures will subside in the back half of the year based upon current trends. Payroll and employee benefits inclusive of noncontrolling interest, which reflects the shift in expenses from noncontrolling interest to labor benefits under the new partner compensation program implemented in April of 2010, remained flat for the fiscal year but deteriorated by 40 basis points in the fourth quarter, as a result of lower-than-anticipated same-store sales. Depending upon the degree to which same-store sales are positive in Q1, we would expect these costs to be relatively flat.
Other operating expenses were favorable by 50 basis points for the fiscal year and 20 basis points for the fourth quarter. These results are evidence that the leverage that is achievable as we grow company drive-in volumes. Looking forward, we have encountered some one-time maintenance costs related to our company drive-ins that will impact the current quarter. We expect these temporary costs in Q1 may result in 40 to 50 basis points of higher expense for the quarter. However, we expect this will be a short-term challenge and should see continued improvement in this line item over the longer term, but the degree will be dependent upon the degree to which we are able to sustain positive same-store sales.
For the fourth quarter, SG&A expenses remained relatively flat, coming in below our original expectation. The fourth quarter variance is primarily attributable to lower compensation expense that resulted from the company's below-target financial performance in Q4. During the fiscal year, SG&A expenses as a percentage of total revenues remain flat, reflecting lower compensation expense and bad debt expense. We have continued to add resources carefully over the past year, which has allowed us to show operating leverage as sales trends have improved.
Our business model was first and foremost focused on franchisee. This is a distinct advantage from a return on capital perspective. Our cash flow was more predictable and stable, while our capital expenditures are lower with an estimated $25 million to $30 million in annual CapEx requirements, depending upon the status of various sales-driving initiatives. Our third quarter refinancing further enhanced our available cash flow. With only $15 million in annual mandatory principal payments, we project we will generate between $35 million and $40 million in free cash flow, which we define as net income, plus depreciation, amortization and stock compensation expense, less capital expenditures and debt principal payments.
Stock compensation expense is expected to be $4 million to $5 million in FY 2012. We recently stated that we plan to use this cash to enhance shareholder value with a stock repurchase program for up to $30 million worth of common stock through the end of our current fiscal year. We believe a share repurchase program represents a solid investment and a good means for deploying our excess cash.
We continue to have a solid balance sheet and exceed our debt compliance covenants by a wide margin, and we anticipate this compliance will continue into the foreseeable future. As Cliff stated earlier, we are pleased with the sales improvements we saw on fiscal 2011. While we may continue to see some volatility in our sales due to external challenges, we believe the improvements we have made to our business will help us sustain positive same-store sales going forward.
Looking to fiscal year 2012. We expect positive same-store sales, and as a reminder, each 1 percentage point change in same-store sales has an estimated $0.03 impact on earnings per share for the year; 30 to 40 new franchise drive-in openings; flat restaurant-level margins reflecting positive comps and some efficiencies from labor costs offset by pressure on commodity costs, particularly in the first half of the year; SG&A expenses in the range of $69 million to $70 million. Now, to add, as we've done historically, we will manage the addition of resources in this area in line with the performance of our business: depreciation and amortization expense of $41 million to $42 million; net interest expense of approximately $32 million; and capital expenditures of $25 million to $30 million.
I will now turn the call back over to Cliff.
J. Clifford Hudson
Thanks, Steve. So to kind of close things up here, before we go to questions, I should say we continue to believe that our business is better positioned today than it was 2 and 3 years ago and that this is a result of the service and product initiatives we've implemented and talked to you about today and previously.
Same-store sales growth remains the primary engine that will drive the results for the remaining levers of our multilayered growth strategy we have talked about, and we're pleased with the overall improvement we saw during fiscal year 2011, but particularly with our company drive-ins. For fiscal year 2012, we expect some volatility to persist in this -- with this broader economic challenges. We're confident though that with the improvements that we've made, that we'll drive positive results in our business during the current year and longer term as well.
And with that, I will open things up and take any questions you may have.
Question-and-Answer Session
Operator
.
[Operator Instructions] The first question today will be from Michael Gallo with CL King.
Michael W. Gallo - CL King & Associates, Inc.
My question is around just the value message. Do you feel it's where it needs to be? Are you seeing any changes in how the value menu is being used by your customers? And is that an area in the current consumer environment that you think you might have to come back and reemphasize somewhat?
J. Clifford Hudson
I appreciate your question. I think it's fair to say that in the more recent past, as we have not promoted the so-called value menu, but instead focused on a more well-integrated approach to the business, improving service, improving quality of food, integrating pricing into the promotion more effectively, more effective engagement with a consumer from a strong focus on food quality and our creative. We have seen -- in our surveys with existing customers, we have seen their perception of our food improve noticeably and materially over the last 12 and 18 months. So our reaction to the question of how does value from one source to another fit in, we like the path we're on more than reverting to the old path of just focusing on discounts on food.
Operator
Moving along, we will go to Brad Ludington with KeyBanc Capital Markets.
Brad Ludington - KeyBanc Capital Markets Inc., Research Division
I wanted to ask on the guidance, Steve, that you're putting out on the pressure in the first quarter on the COGS line. You said 75 to 100 bps net of price increase. Is that net of the 2% effective? Or it's just the smaller incremental fall price increase you should be taking?
Stephen C. Vaughan
That's net of the 2% effective that we'll have in place for the quarter.
Brad Ludington - KeyBanc Capital Markets Inc., Research Division
Okay, good. And then just looking at the revenue line this quarter, the lease revenue was down rather significantly. Is there a reason for that? And is that something we should expect to continue?
Stephen C. Vaughan
That -- let me see if I can-- I think you may be referring to the decline in other. Is that your question, Brad?
Brad Ludington - KeyBanc Capital Markets Inc., Research Division
Yes, the other. You break it down to franchise fees and then lease revenue.
Stephen C. Vaughan
Yes, lease revenue actually went from $1.8 million to $1.7 million. Other revenue went from $1.3 million down to about $200,000. And that really was attributable primarily to a one-time charge that flowed through to our company as a minority interest holder in some restaurants. And so I would say that we would not expect that to continue going forward. We would expect it to be more in the range of the $1.2 million to $1.3 million range.
Brad Ludington - KeyBanc Capital Markets Inc., Research Division
Okay. And you're right on the Other line. I'm sorry, I was looking at the wrong line title. So continuing back at a more normal rate going forward?
Stephen C. Vaughan
Yes. That's correct, Brad.
Operator
Moving along, we will go to Jeffrey Bernstein with Barclays Capital.
Jeffrey Andrew Bernstein - Barclays Capital, Research Division
Two questions. First, related to kind of the franchise health and the re-acceleration of growth. I know you showed a map where you have the northern border states that you've entered more recently. I'm just wondering now that you've been there a few years, one, if you could just could talk about the trajectory of sale volumes in those markets and do they start above system average and then decelerate as expected over the next few years. Just wondering where they stabilized, whether those kind of northern markets are still running above the system average or whether there are some concerns that perhaps it's difficult to sustain that level. And then I had a follow-up.
J. Clifford Hudson
Okay. We are seeing, Jeffrey -- we continue to see very strong openings in new markets wherever those new markets are located, north, south or otherwise. We do see a fall off. However, we still have most of our newer market stores, including a lot of the stores in the northern part of our geography that average well above the system average. And we are seeing, in our newer markets, particularly as our cable advertising expenditures have increased, good performance. So it's something that we're going to continue to monitor overtime and continue to make sure that we're doing what we need to do to be successful. But we've got a lot of stores in new markets that's been open for quite a long period of time, 3 years and more, that are performing very well.
Jeffrey Andrew Bernstein - Barclays Capital, Research Division
And if that's the case, which is that's what we had believed, it seems like -- the 30 to 40 franchise units you're talking about in '12, it seems like you're still expecting a couple of years away before that accelerates. I'm just wondering why that is, and I have a follow-up I guess. It seems like this year, we should expect net closures after the kind of average closure rate we've seen.
J. Clifford Hudson
Well, I think the most encouraging thing to us is the growth in our same-store profits, which grew by about $5,500 last year. And historically, and I think this will be true prospectively as well, when we see our sales and profits start growing, then we'll see our development pick up. And we're confident that, that will be the case as we go forward.
Jeffrey Andrew Bernstein - Barclays Capital, Research Division
Okay. But this year, we should expect net closure with the 30 to 40 gross openings?
J. Clifford Hudson
Yes. I think, we'll probably be roughly flat.
Stephen C. Vaughan
Yes, we'll probably be roughly flat.
Jeffrey Andrew Bernstein - Barclays Capital, Research Division
Okay. And then just last one. Did you give us the commodity cost basket increase? I know you talked about beef ending in January, but what you're thinking about for the full year fiscal '12 in terms of basket inflation and what's contracted for how long or...
J. Clifford Hudson
No, we didn't get into the details on that. We did give you the guidance on the -- sorry, outlook for the first quarter, the 75 to 100 basis points. So and we have very good visibility into the first quarter. We've got our beef contract that's coming up January 1, and that will be renewing. So we expect to see some continued pressure in that area. However, I think as we lap over for the increases that we experienced last year, moving into the spring and summer months, our outlook is that we'll still have some pressure but it should subside quite a bit. So overall, I think as we look out for the entire fiscal year at this point, we would probably expect somewhere in the neighborhood of 50 basis points, plus or minus. And again, we'll get more clarity as we get these contracts renewed. But we do expect that we can offset that with leverage from higher same-store sales.
Jeffrey Andrew Bernstein - Barclays Capital, Research Division
That 50 basis points is prior to leverage from higher same-store sales?
J. Clifford Hudson
Yes, that's in food and packaging where we don't typically get leverage, correct.
Operator
We will go to Matthew DiFrisco with Lazard Capital Markets.
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
Steve, I've got a couple of quick bookkeeping questions. Sorry, if they were mentioned already. I missed them. Cash, what was it at the end of the quarter? I'm just trying to determine net debt.
Stephen C. Vaughan
Yes, so we ended the year, Matt, with $29.5 million of unrestricted cash.
Matthew J. DiFrisco - Oppenheimer & Co. Inc., Research Division
Okay. And then also I think in the guidance, you talked new franchise drive-ins of 30 to 40. So no company-owned stores in FY '12?
Stephen C. Vaughan
No. We do anticipate that we will open probably a similar number of new company drive-ins as last year, which we opened 3. So it will probably be in that same range
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
So 3 company-owned stores. So then, when looking at the CapEx guidance of $25 million to $30 million, I guess, you're almost complete with the reimaging. So what's the -- I'm wondering on what's your budget is going to be spent on.
Stephen C. Vaughan
So we'll continue to have some relocations and rebuilds, which we typically do anywhere from 3 to 5 of those a year. So I would expect us to have some relocations and rebuilds. We will have an account of what is called maintenance CapEx, just replacement of ongoing restaurant level equipment. And then we are continuing to invest in our technology infrastructure, which will involve some investments, both at the corporate level, but also some investments at the drive-in level. And we've talked previously, one of our initiatives in this coming year that we'll be investing in is our supply chain, and that's all factored into that $25 million to $30 million.
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
So is there any factor in there as far as franchise acquisitions?
Stephen C. Vaughan
No, there is not.
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
Okay. And then I guess, either for you or for Scott. I'm just trying to go into learning more about the royalty rate, the descending of it, and that your average weekly sales seem to be in line with almost a year ago. And you had -- we've had a couple of quarters before where you've had a negative fixed comp or so, and you saw equal or less degradation on the royalty rate. And I don't think the incentive plan is anything new this quarter. It's been out there a couple of years now. It seems like 1.5 years or so at least. And I'm wondering is there -- the comment of troubled franchisees, are you now -- are there more guys not paying? Or are they getting abatements short time or for a short period to help them stay afloat or have things deteriorated with them?
W. Scott McLain
No, Matt. I mean, we -- really, there's a couple of things that are impacting the royalty rate. Part of what you're seeing in the fourth quarter is any change we make is going to be the most pronounced in the fourth quarter because that's when the volumes are higher. So that's one reason why it could be more pronounced in the fourth quarter. But we're doing a couple of different things. We do have some development incentives that are out there that have helped us. And we've also done some things with some challenged markets, which while it's impacted our average royalty rate, it's helped those markets. And so that's really what's impacting the royalty rate. It is not the number of challenged markets. It is not increasing. In fact, in some areas where we have been struggling in the past, places like Florida and California, we're actually seeing our business perform significantly better.
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
Okay, but...
Stephen C. Vaughan
Matt, I would add on the development incentives, those are cumulative. So while we've been offering those now for a couple of fiscal years as new drive-ins have opened up under those incentive programs, it does tend to have a little more effect on the royalty rate because it includes the ones that opened 2 years ago, then the ones that opened in the third and fourth quarter.
W. Scott McLain
Yes, that's right.
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
So I guess, and looking ahead at, are we looking for a same-store sales recovery to be the biggest influence on improving that? Or is it also the potential to sort of move people out of the category of challenged markets and some near-term things you might be doing now that might go away?
W. Scott McLain
Same-store sales will cure all challenges.
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
And in that, I guess, what would be -- what is the bogey, same-store sales from a franchise to do sort of flat royalty as implied in your guidance?
W. Scott McLain
I don't have specific number for you, but I would refer you back to the third quarter where we had nice same-store sales and a very nice increase in our average royalty rate. So if we get good same-store sales, we tend to see our royalty rate grow and that should continue to be the case.
Operator
Moving along, we'll go to John Glass with Morgan Stanley.
John S. Glass - Morgan Stanley, Research Division
Cliff, you'd mentioned that promotions used to drive all day parts up. And now you're saying you drive a promotion and just when that promoted item would increase, and your goal is to go back to those promotions that drove all day parts. Can you just remind me or review what is going to change? What has changed to do that? It seems like that it was even an issue perhaps in the fourth quarter as you saw the hotdog promotion roll off and the new promotion come on, and there was a falling off. So I don't know if that did have impact. What was the cause of the disruption in the comps in the fourth quarter? But also just remind us how you're going to -- how the new portions will impact more day parts..
J. Clifford Hudson
Okay. A slight modification to the comment you attributed to me. So rather than us -- if you interpreted or heard my statement to say we would go back to promotions that affected all day parts. Rather, what we will do is blend day parts over time in effect, so it'd be day parts media, et cetera, promotions that can affect multiple day parts. So we said that for 2 reasons. One is that to the extent that someone looks in our business and says: "What is your particular challenge for driving positive comps on a broader basis?" Ours is different from much of our competition because of the business being spread as it is across multiple day parts. But in addition to that, how we would do that going forward. In fact, in the recent past, as we have modified some of our offerings and focusing on day parts we weren't focusing on 12 months ago, 8 months ago and so on. We have seen those day parts respond positively beyond lunch and dinner. So what we'd be looking to is a blend of promotions, use of media, use of creative, et cetera. So to hit on more of those day parts in a shorter period of time, so as to more positively impact same-store sales on a sustained basis.
John S. Glass - Morgan Stanley, Research Division
Is that in place today? Is that something we'll see the effect of as early as this current quarter? Or was it in place last quarter?
J. Clifford Hudson
Yes. Well, some elements of it were in place late fourth quarter and elements of it into this quarter. So it's an ongoing -- it is an ongoing -- it will be an ongoing strategy. So I guess, it's fair to say that any given point in time, the strategy is in place. The question is the number of day parts that we can affect at any given point in time. And it's really more of a rolling issue than it is a single-point-in-time initiative.
John S. Glass - Morgan Stanley, Research Division
Okay. And then just a quick follow up. You said you were -- the positive trends continued in the current fiscal year, meaning the current fiscal quarter. Can you remind us how the comps progressed last year at this time? Your comparisons, I think, are more difficult this quarter. Are they more difficult in the early parts of the quarter? Or did sales get better as the first quarter last year progressed?
Stephen C. Vaughan
John, we did have a pretty nice first quarter last year. September and October were a little stronger than November, primarily attributable to weather. So we are moving into that time of year when the weather has an impact on our business. But we did see the first half of last year of that quarter and the first quarter be a little bit stronger.
Operator
The next question will be from Joe Buckley, Bank of America Merrill Lynch.
Joseph T. Buckley - BofA Merrill Lynch, Research Division
Steve, you mentioned higher but one-time maintenance expenses in the quarter. The way you phrased it made it sound like it was some specific program or maybe some specific issue the you had to address in the company drive-ins? Could you elaborate a little bit, if that's the case?
Stephen C. Vaughan
Well, I don't really want to go into a lot of detail. It's related to a transition issue that we're experiencing. So extra costs but it's not something that we expect will be ongoing.
Joseph T. Buckley - BofA Merrill Lynch, Research Division
Okay. I don't follow you, but maybe that was the goal. Just a question to follow up on John's question about trying to impact more than one day part. Does that mean that the marketing has to be less product-specific and more experience- or brand-oriented?
J. Clifford Hudson
Well, the method that we would utilize to do this, getting to that level of particular feedback is probably something I'm not going to get into today. But I think there are varying ways to do that over time and different products can affect more day -- one product may affect more day parts than another product. So there are a variety of ways to do that, by product, by medium, by nature of creative. And so what we are doing is working with some appropriate mix to affect as many day parts in a given period of time as possible.
Operator
Moving along, we'll go to Will Slabaugh with Stevens.
Will Slabaugh - Stephens Inc., Research Division
Quickly on marketing again. Wondering if you could talk about some of the specific changes you made there. It seems like one of those was just adding a price point into the ads. And also, it seems like most or all of the ads that I've seen have been hotdog-focused. So just wondering if you've seen that mix rise in hotdogs in recent months.
J. Clifford Hudson
Well, as you would expect, as we promote hotdogs, we do see -- we do move more hotdogs, and then the same is true with other products. We'll move more of what specifically what it is we are promoting. The blend of characteristics that I think it makes the marketing activity more successful goes well beyond price, though price is a -- can be an important characteristic. But I think, as the summer progressed, we made a number of changes to the nature of the creative and the promotional activity that had a positive impact, and price was one of those.
Will Slabaugh - Stephens Inc., Research Division
Okay. And just as a follow-up there, wondering if you could talk about trends you're noticing with the consumer, if you've seen any notable changes in frequency or mix in check, up or down in the past couple of months.
Stephen C. Vaughan
Yes, we haven't really seen any significant shifts in that area.
Operator
Moving along, we'll go to Rachael Rothman with Susquehanna.
Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division
This is Jake Barlett, in for Rachael. Following up on that last question, can you just give us the traffic mix in check in the quarter?
J. Clifford Hudson
Yes. At our company drive-ins, we were running about 2% check, which is roughly what our average check increased for the quarter. So basically, we ended up slightly negative on traffic.
Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division
So mix was flat?
J. Clifford Hudson
Correct.
Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division
Okay. And then I had a question about the SG&A. It looks to be -- it looks like your guidance is for growth of about 7% in 2012. Just wondering what's driving that, whether there's no [ph] opportunity to cut cost after you've re-franchised, whether that's an acceleration in advertising costs? Maybe you could go into that.
J. Clifford Hudson
Well, I would -- a couple of things that I would mention is we did actually have a decline in SG&A in fiscal year 2011 versus 2010. So we've been pretty diligent about managing our SG&A costs. What we typically do is go through a business planning process in the summer months. And then we give guidance to the market and outline our expectations based on that planning process. As the year progresses, depending upon how we execute against those plans, we will add resources to try to support the business to the extent that our revenues don't meet up with our -- match up with our plan, just like we did in fiscal 2011. We can delay adding some resources and can manage those costs. So I think, as you look to 2012, we gave guidance based upon our business plan, and depending upon how we perform against that plan, we may hit that level or we might decide to manage to a lower increase. But I think, in terms of the diligence in managing those costs, we feel pretty good about how we've been able to do that over the last couple of years with our re-franchising.
Operator
The next question will be from Nicole Miller from Piper Jaffray.
Nicole Miller Regan - Piper Jaffray Companies, Research Division
My question was around the history of your successful 12- to 18-month products and promotion pipeline. Historically, you've been successful at having a very lengthy like 12- to 18-month products and promotions pipeline. But you're now talking about being more nimble because the consumer is constantly shifting. Can you give us some examples of what you can do with the pipeline and move things around and how you can make that happen?
J. Clifford Hudson
Well, historically, we have made -- we have promoted items across a variety of day parts, and that includes really almost all of our day parts. I'm not sure -- I guess, I'm having a little trouble with the premise of the question.
Nicole Miller Regan - Piper Jaffray Companies, Research Division
I'm just wondering, are things -- it seems to me always like things were set, like you know what you're going to do next month for the promotion and 3 months out and 6 months out. But now 6 months out might look real different than what you think today. So do you -- how are you going to be so nimble?
J. Clifford Hudson
Well, I suppose one of the things -- I mean, looking -- instead of looking forward, perhaps looking back because I'd rather not talk about how we might move it going forward. If you do look at this summer, when we moved to hamburger promotion early summer, May into June, we found that was not working in the manner that we had hoped and expected. In the pretty immediate term, we shifted the nature of the promotion and that from a creative standpoint, pricing standpoint, the nature of the creative, I mean, we have analyzed [ph] to something a little bit more food-focused. So in a relatively short period of time we shifted each of these. And in some ways, that could be representative of what you'd be -- I suppose what your question may be. In that case, it was a meal day part. In both cases, more lunch- and dinner-focused. But we do have the flexibility going forward to shift, particularly secondary messages by day part as we believe that's warranted.
Operator
Next question comes from Peter Saleh with Telsey Advisory Group.
Peter Saleh - Telsey Advisory Group LLC
Just wondering if there's any incremental advertising spend going on, on the SG&A line that you can talk to for next year?
Stephen C. Vaughan
No, there is none planned or included in that SG&A outlook figure.
Operator
Moving along, we'll hear from Sharon Zackfia with William Blair.
Sharon Zackfia - William Blair & Company L.L.C., Research Division
I had a kind of a broader question on how you assess Sonic's value proposition at this time. I may have just gotten lucky but I got a survey monkey that asked me about 300 questions on Sonic and what I would pay for different products given different menu board configurations. And obviously, you're doing some research there. So if you could just kind of give us an idea as to where you think you see that customer resistance? How moving the menu board around helps or hinders the ability to take price in an environment like we're in right now? Just some insight because it feels like it's been something that you've struggled with on and off for a couple of years now?
J. Clifford Hudson
Well, we have gone through over a period of time analysis on looking at the number of products on the menu, the overlap between products and the testing, whether removal of one product or line of products or another has impact on sales, customer response, et cetera. So understanding how customers react to this, I think, is important from our viewpoint. In addition to that, tests regarding placement, where items are on the menu, customer -- eye movement that integrates into this. These are tests that we have conducted, as well on our menu because of its size and differentiated nature versus some of our competition. So we have experimented with this and probably will continue to do to some degree in the spring. You saw some modifications and not just the artistic designs in the menu but placement of items. And from our perspective, we have that opportunity to do so going forward in a way that is likely to increase check and frequency of customers.
Operator
Moving along, we will go to Brad Ludington with KeyBanc Capital Markets.
Brad Ludington - KeyBanc Capital Markets Inc., Research Division
Cliff, I wanted to ask -- on the last call, I think you said the new menu was adding to a positive check average. And now we're talking about kind of flat mix. Was that just talking about the price increase? Or has something changed? Or people pulled back a little bit more in recent months, do you think?
J. Clifford Hudson
Well, I can't say that, that's related -- so the idea related to the menu. We have had, as Steve mentioned a moment ago, slightly negative traffic and positive check. I don't know that we see a connection between those 2.
W. Scott McLain
Yes, I mean, we have -- as Cliff mentioned earlier, we have worked on the layout of the menu, primarily to make it easier for customers to navigate. So the majority of what we're seeing in check is coming from price, not what we're doing on the menu.
Brad Ludington - KeyBanc Capital Markets Inc., Research Division
Okay. And then Steve, just also, I'm sorry if you already said this. But could you tell me what the total debt balance is? Not net, I got your cash balance, just total debt outstanding.
Stephen C. Vaughan
Let's see. We had our notes were roughly $500 million, just short of $500 million and plus probably about $35 million or so of capital leases. So total debt somewhere in the ballpark of $530 million.
Operator
Moving along, we'll hear from Chris O'Cull with SunTrust Bank.
Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division
Sorry if you guys have already addressed this, but would you elaborate on the labor efficiencies you expect to get next year?
Stephen C. Vaughan
Sure. A couple of things, Chris. Number one, to the extent that we get positive same-store sales, we do believe that there is leverage in our labor line. We've lapped over the implementation of the partner compensation program. We're seeing the tenure of our operators increase as turnover has declined. So we're starting to see more efficient operations. And then secondly, as we have continued to work on our labor management with some labor planning tools that Omar, the President of SRI and his team have introduced. So I think a combination of putting those tools in place and then having our turnover decline, we're anticipating continued improvement in labor.
Operator
This time, we'll hear from Keith Siegner with Crédit Suisse.
Keith Siegner - Crédit Suisse AG, Research Division
A couple of questions on the pricing. So the pricing you've taken thus far, some in April, some in June and granted, it seems like most of the kind of same-store sales slowing from third quarter to fourth quarter is more promotional and macro. But I'm just curious. Where have you taken the pricing? Or how has been the approach to pricing? The second question is have you been testing this next round of price increase? And what's been the effect of that so far? And then the third part is where are the franchisees in pricing right now on average as a system? Are they ahead of the company? Are they behind the company? And what -- have they also been testing this next round of pricing?
Stephen C. Vaughan
Okay, so I'll take a shot at that and then Cliff or Scott can add on. In terms of where we've taken pricing, that's something that we don't like to discuss publicly, so I'm not going to get into that detail. I will tell you that we have tested the pricing that we took, and we were very comfortable with the results of that test. And so when we implemented that pricing in April as a company and then assisted our franchisees with recommendations that were implemented a little later, primarily in June, we felt good about the tests and have felt good about the results of that. The franchisees have been a little more aggressive than the company on pricing. They're probably running closer to 2.5% to maybe even 3%. As I mentioned, we don't anticipate this next price increase when we roll out or introduce a menu that will be slightly changed in probably November, that we'll be taking much price, very, very little amount of price taken at that time.
Keith Siegner - Crédit Suisse AG, Research Division
And it sounds like then probably limited pricing for them in that rollout as well?
J. Clifford Hudson
Yes. That would be our expectations, yes.
Operator
And at this time, we have no further questions in queue. I'll turn things back over to Cliff Hudson for any additional or closing remarks.
J. Clifford Hudson
Well, we appreciate your participation today, and our Chief Financial Officer and Vice President of Investor Relations stand available to answer any further questions you have once we've concluded. But we appreciate your continuing interest in the company. And as we stated before, we believe this mission that we have in place should stand well in terms of continuing to drive the business going forward. We look forward to sharing those results with you over time. Thank you very much.
Operator
And again, this does conclude today's conference call. Thank you for your participation.
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