Sonic's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Sonic Corp. (SONC)

Sonic (NASDAQ:SONC)

Q1 2012 Earnings Call

January 04, 2012 5:00 pm ET

Executives

Claudia San Pedro - Treasurer and Vice President of Investor Relations

J. Clifford Hudson - Chairman and Chief Executive Officer

W. Scott McLain - President and President of Sonic Industries Services Inc

Stephen C. Vaughan - Chief Financial Officer and Executive Vice President

Analysts

Larry Miller - RBC Capital Markets, LLC, Research Division

Michael W. Gallo - CL King & Associates, Inc.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

John S. Glass - Morgan Stanley, Research Division

Will Slabaugh - Stephens Inc., Research Division

Sharon Zackfia - William Blair & Company L.L.C., Research Division

John Dravenstott - KeyBanc Capital Markets Inc., Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Peter Saleh - Telsey Advisory Group LLC

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Robert M. Derrington - Morgan Keegan & Company, Inc., Research Division

Howard W. Penney - Hedgeye Risk Management LLC

Operator

Hello, and good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Sonic Corporation First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Ms. Claudia San Pedro, Vice President of Investor Relations. 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 first quarter fiscal year 2012, which ended on November 30, 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 of 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 and 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, January 4, 2012. The archived replay of this conference call webcast will be available until January 11, 2012. This call is the property of Sonic Corp. Any distribution, transmission, broadcast or a 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 one hour. If we have not gotten to your question within that hour time slot, please contact me at area code (405) 225-4846, and we'll make the appropriate arrangements to answer your questions.

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. Good afternoon, everyone. We appreciate your joining us today for this conference call where we'll be talking about our first fiscal quarter results and also some more longer-term business strategy and strategies for use of capital.

As you saw in our earnings release that we did release today, our system-wide same-store sales for the first fiscal quarter were 0.1% positive. This consisted of a 0.2% increase at our franchise drive-ins and a 0.1% decline at company drive-ins. We did experience some weather-related changes or challenges, rather, in Texas and Oklahoma. And this disproportionately affected our drive-ins toward the -- our company drive-ins toward the end of the fiscal quarter.

We continued to see some patches of sales volatility consistent with prior quarters that weighed in -- weighed down the results. In addition, we also faced restaurant-level margin pressures during the quarter, including increased food and packaging expenses, and Steve’s going to talk more about those in a few minutes.

But having said that, we continued to see some positive aspects -- experiences within our business as well during the first quarter. System-wide same-store sales were slightly positive, showing improving trends versus the fourth quarter of last fiscal year. But more encouragingly, the system same-store sales have been positive 3 of the last 4 months, so -- this includes December, so 3 of the last 4 months.

And it was a more challenging October that created something of a drag on the first quarter comps. And with that, we're confident that the overall trend of our business is improving, albeit at a slower pace than we had expected. I'll discuss a little later in the presentation the steps we will be taking to improve the results.

The breakfast that we have promoted -- been promoting since August, breakfast has been a consistent performer since early summer, and we continue to work on refining our promotion on creative strategy to drive multiple day parts, very much a part of our strategy historically and refining part of our strategy going forward. We also continue to generate solid free cash flow and utilize that cash flow to pay down $3.8 million of debt and repurchase $10.5 million of stock in the quarter.

Now we talked for some period of time about our value equation, how we look at our business. As you know, we work diligently to improve the value equation by focusing on the numerator or the consumers' overall experience in the last couple of years. The first component of our differentiated experience is providing a high quality of service and execution at the drive-in level. And our customer service stores continue to bear out the success we've had delivering improved service to our customers, both at company and franchise stores. And the second component of that is improving food quality, and that's been the case whether we’ve done so with -- through the upgrade of our core items such as ice cream, our Chili Cheese Footlong Coney or the introduction of new items like our 6" All Beef Hot Dogs.

The introduction of new product news and differentiated core menu items really is an important part of rebuilding and moving to a positive performance our same-store sales. This month's promotion features 2 entrées and 1 side all with the chili cheese topping, and it's an example of a core differentiated product that's unique to us amongst and within QSR space. Each of these 3 promotions, the 2 entrées and the side, is promoted at $1.99, which gives us a very distinctive value proposition to consumers as well.

As the year progresses, we're going to promote 4 differentiated products as we have in the past but also offer new product news across multiple day parts. We're confident that these initiatives are going to pay off. We've seen elements of that this fall, and we're clearly not yet where we would like to be though with regard to our overall sales performance as we continue to work towards improved sales growth.

So let me put this in context. Over the last couple of years, our customers tell us that we’ve improved the quality of our food, the quality of our service and the value of our offering. In the last year, based on third-party audits that we've done over the years, but in the last year, we've made considerable improvement in media purchasing 2011, and we are confident this will have continuing positive impacts through this fiscal year.

Though there's a continuing potential improvement in the areas of food and service quality and media purchasing, my belief is that the biggest opportunity in the medium term lies in the promotional utilization of all 5 of our day parts, the rotation of the product promotion appropriate to those day parts and promotional creative, primarily televisions, that clearly and adequately supports this day part strategy.

In this context, I also want to mention that our Chief Marketing Officer, Danielle Vona, will be departing her employment with our company and a search for her successor is underway. I expect to have this search concluded in late winter or early spring.

Now the continuing focus on growing profits, this is true at both the drive-in and corporate level. This is a continuing key objective for us. Improved company-owned drive-in performance is also an important component to increasing the company's EBITDA in the near term and long term.

Our company drive-in performance over the last year has experienced some improvement, including reduced turnover of management and improved labor efficiencies. Most recently, our new and developing markets are outperforming our core markets as a result of improved media efficiency, particularly at the national level.

In addition, colder and wetter weather posed some challenges in the latter portion of the first quarter and in December for our core markets and this disproportionately impacted our company drive-ins. We continue to believe, though, that company drive-in performance provides a significant opportunity for meaningfully growing our operating income near and long term.

From a financial perspective, we continued to optimize our capital structure during the quarter, paying down $3.8 million of fixed-rate debt and buying back $10.5 million of our outstanding shares of common stock. Our strong cash flow continues to provide us an opportunity to add shareholder value despite the challenges we faced with regard to external environment in the near term.

Now as it relates to creating shareholder value, over the next 2 or 3 years, we'll also be focused on strengthening our balance sheet by increasing our EBITDA and paying down debt, thereby reducing our leverage ratio to approximately 3x EBITDA. We’ve discussed the opportunity to improve operating income with improved and sustained same-store sales growth for the system and improve margins at company drive-in level.

With solid and consistent free cash flow, we'll also have the flexibility to use our excess cash opportunistically and strategically to pay down debt or repurchase shares to ensure reasonable leverage levels and increased shareholder value over the next 2 to 3 years.

Going forward, we remain focused on promoting quality differentiated products, refining our efforts to effectively engage customers to drive traffic and multiple day parts and provide service that these efforts will enable us to sustain positive same-store sales in fiscal 2012 and see improvement in the short term and long term. And though our winter quarter is our most volatile from a weather and sales standpoint, we believe that our spring quarter of March, April, May should represent our best near-term opportunity to do many of our marketing initiatives to a more refined level of implementation than we've experienced in some time.

With that, I'm going to turn it over to Scott McLain, and he's going to update you on some of the franchising, revenues and development. Scott?

W. Scott McLain

Thank you, Cliff. Our core franchise business remains very solid. In the first quarter, we saw a slight decline in our 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 our royalty rate, they’ve helped us sustain development and stabilize performance in developing markets.

This, combined with improved media efficiency, has resulted in solidly positive same-store sales performance for these markets. The impact of the incentives will continue to be at play during the coming year and will keep the average royalty rate relatively flat depending on 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 2 new drive-ins during the quarter, and we finished the quarter with 3,555 total drive-ins operating in 43 states. We also still expect to open 30 to 40 new drive-ins this fiscal year.

As Cliff mentioned earlier, we are pleased that our new and developing markets are experiencing positive same-store sales. We believe this improvement will increase our franchisees' overall confidence in the business, which is the single biggest factor in their willingness to continue investing capital. We did close 8 drive-ins during the first quarter, which is substantially less than the 23 we closed for the same period the prior year. We continue to actively evaluate our lower volume drive-ins, and looking ahead, we expect our rate of closings to be roughly consistent with prior year if not somewhat lower.

We believe our rate of closings remains relatively modest overall given the tenuous current economic environment and the number of restaurants in our system. Despite the challenges we faced, we still have a long runway for growth ahead, and we fully expect that continued improvement in sales and profits will translate into a renewed emphasis on drive-in development. However, as we've noted before, given the 12- to 24-month development cycles, 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 multilayered growth strategy become a major factor.

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 first quarter of fiscal 2012, we reported earnings per share of $0.09 compared to $0.12 in the first quarter of fiscal 2011. Excluding a one-time tax benefit of $0.02 per share from a favorable tax settlement, net income per share was $0.10 in the first quarter of 2011.

As Cliff mentioned earlier, we are pleased with our overall improving trends but continue to see sales volatility month-to-month. We believe refining our creative and promotional strategies can yield improved and more predictable sales results, particularly with respect to traffic, and continue to focus on this area of our business.

Overall, operating income margins declined 70 basis points to 13.1% in the first quarter of fiscal 2012, reflecting lower revenues, commodity pressures and higher technology expenses, offset slightly by labor efficiencies at the store level and by a reduction in SG&A costs. Due to its immateriality, noncontrolling interest expense is now included in the payroll and other benefits line. Taking that into account, our restaurant-level margins declined 130 basis points during the first quarter.

Looking at each individual line item. Consistent with our expectations, food and packaging costs were unfavorable by 80 basis points for the first quarter. Beef and cheese were the primary cost drivers. We took a small price increase in the quarter to keep our cumulative pricing at approximately 2% as we lapped over a very modest price increase last fall. Commodity inflation will continue to pressure margins into the second quarter. We are projecting unfavorable costs of 75 to 100 basis points net of pricing for the second quarter of fiscal 2012.

One item to note is that we recently locked in our beef contract for calendar year 2012. With this contract in place, we now have certainty for virtually all of our food and packaging costs with the exception of cheese and ice cream mix, which we continue to buy on a cash basis due to the steep premium required to lock in future prices. As a result, we now expect that our food cost pressures will subside to the 2% to 3% range in the third and fourth quarters.

Payroll and employee benefits, inclusive of noncontrolling interest, improved 20 basis points in the first quarter as a result of improved labor controls. Other operating expenses increased by 70 basis points for the first quarter, primarily caused by higher costs associated with store-level technology support and increased credit card fees effective October 1. The technology support cost pressures related to a vendor transition are expected to moderate going forward.

For the first quarter, SG&A expenses declined versus prior year and previous expectations. The decline is primarily attributable to lower variable compensation costs comprised of management bonuses and long-term incentive compensation, which are based on meeting certain performance targets. Additionally, we continue to add resources carefully, which should position us to show operating leverage as sales trends improve.

Our business model is first and foremost focused on franchising. This is a distinct advantage from a return on capital perspective. As a result, our cash flow is more predictable and stable, while our capital expenditures are lower with an estimated $25 million to $30 million in annual capital expenditures depending upon the status of various sales-driving initiatives.

Our first priority remains to reinvest in our business with a filter that these investments must meet our return on investment criteria. We will continue to evaluate investment options and may adjust our CapEx levels as justified by the return on investment of future revenue-generating projects. In 2012, 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 mandatory debt principal payments.

As Cliff stated, our goal over the next 2 to 3 years is to enhance shareholder value by increasing operating income with improved same-store sales and reducing our debt to achieve leverage levels in the 3x debt-to-EBITDA range. With solid free cash flow, we have the flexibility to use this cash to enhance shareholder value by investing in our brand, paying down debt or repurchasing shares. We will continuously evaluate the state of the economy and our business to determine the right balance of each.

During the quarter, we repaid $3.8 million of our debt and repurchased $10.5 million of stock. We continue to have a very solid balance sheet and exceed our debt compliance covenants by a wide margin.

Looking forward to fiscal year 2012, we expect positive same-store sales. We may continue to see some volatility in our sales due to external challenges. However, we believe the improvements we have made to our business will help us sustain our positive same-store sales momentum going forward. And as a reminder, each 1 percentage point change in same-store sales has an estimated $0.03 impact on annual earnings per share.

We expect 30 to 40 new franchise drive-in openings, also slightly unfavorable restaurant-level margins as a result of commodity cost increases and higher operating expenses, particularly in the first half of the fiscal year, partially offset by labor efficiencies; SG&A expenses in the range of $68 million to $69 million, however, we will manage the addition to resources in this area in line with the performance of our business; depreciation and amortization expense of $41 million to $42 million; net interest of approximately $32 million; and a tax rate between 37.5% and 38.5%. Due to the December 31 expiration of some employment tax credits, we will be on the higher end of this range unless the credits are reinstated. And then finally, capital expenditures of $25 million to $30 million.

I will now turn the call back over to Cliff for some closing remarks.

J. Clifford Hudson

Thank you, Steve. So in summary, we continue to believe our business is better positioned today than it was 3 years ago as a result of service and product initiatives we've implemented. Our same-store sales growth remains the primary engine that drives our business. And our solid free cash flow provides us the business flexibility to complement our earnings growth or mitigate our risk.

For the remainder of fiscal year 2012, we expect to see some sales volatility, have that persist given the economic challenges we confront. But we're confident that the improvements that we've put in place will drive results in our business during the current year and longer term as well.

This concludes our prepared remarks, and we're happy to accept any questions that you might have for us.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Larry Miller with RBC Capital Markets.

Larry Miller - RBC Capital Markets, LLC, Research Division

I have one question. It's sort of 2 parts and it's really about your same-store sales guidance. And it seems to me that maybe positive comps at this point might be slightly optimistic given the harder comparison. So I just wanted to get your sense on why you're confident. Really, what's working well right now? You talked about the volatility in the quarter. It would be helpful to kind of understand what the range is in the quarter. And then the tangential question here is that the marketing campaign that you guys have been developing, it sounds like it's a key part of driving same-store sales going forward. How is that affected in terms of timing with the CMO leaving? So just your confidence in same-store sales and when you might get that marketing campaign in effect.

J. Clifford Hudson

Yes. So the first part of that, the confidence that we have, as we mentioned earlier in the presentation, the first 4 months of this fiscal year, 3 out of 4 months have had -- we've achieved positive same-store sales. The base of that in terms of having improved the quality of product the last couple of years and customers telling us whose lives are improving, improving the of quality of service, customers tell us as much, improve the media buying and we've seen very concrete information that that's the case and that’ll be the case in the coming months so we should be seeing increased exposure with consumers in terms of seeing our creative on television and beyond. So these are the types of things that give us confidence in the base that's already there. In addition to that, we are working to continue the improvement of the creative, the strategy of the creative, better alignment with -- as we would have historically, you might say a pre-recession environment or a multiple day part strategy. So in the coming months, we will, from our perspective, move to improve what had helped achieve 3 out of 4 positive months in the first part of the year and build on that as the year progresses. So closely associated with that, in terms of the media -- excuse me, in terms of the creative strategy and the campaign into the immediate future, our CMO's departure in the coming months through the spring, et cetera, will not affect that. We're on that path with our agency, and we'll see that implemented moving into the spring and see what we believe will be the benefit of that in terms of the nature of the creative. So not disruptive, but we should have a basis for some improvement from a qualitative standpoint on what we've had in the last several months.

Operator

And next we'll hear from Michael Gallo with CL King.

Michael W. Gallo - CL King & Associates, Inc.

My question, I know you highlighted that breakfast has been doing a little bit better. I was wondering if you could discuss some of the other day parts or areas, whether you've seen any impact on your drink business and some of the competitive encroachments in that area. And just some of the areas that have been more challenging and what you're doing to address some of them.

J. Clifford Hudson

Well, in this more recessionary environment, the day part that has been the most challenging has been the evening day parts. We would define that as after 8 p.m. I think this is probably something we spoke about before. But as we look at those 5 day parts, the breakfast, lunch, afternoon, dinner and evening, in the last couple of years, it is the evening that's been the most challenging. And that's affected, in part, no small part because of the employment picture of the younger population that may be more likely to be out and utilizing that day part. So in terms of marketing strategies to offset that, we'll discuss those in coming months as we implement marketing strategies to address it. But I think it's fair to say those are kind of the bookends of the business right now, the after 8 p.m. being the most challenging and the breakfast before 11 a.m. being the day part with the most momentum -- positive momentum.

Michael W. Gallo - CL King & Associates, Inc.

In terms of just the beverage business, I mean, that held up for a while. Are you continuing to see that held up given there are some of the competitive encroachments?

J. Clifford Hudson

Well, we -- and throughout the recession, it has been our -- until we started promoting breakfast in that August-September time frame, the afternoon was our most consistent grower of traffic in sales. Breakfast has surpassed that with the new product news and creative attention against breakfast. So breakfast surpassed that in the August-September time frame and continued.

Operator

Next we'll hear from Brian Bittner with Oppenheimer.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

It appears you got much more efficient on the SG&A line this quarter and partially helped by your lower variable costs that you kind of just alluded to. But the line's running at a $62 million run rate, and your guidance is more like $68 million to $69 million. So I was wondering if you could just help us understand why G&A will be trending up over the next 3 quarters. And maybe if there is an ability to kind of keep it tamed because it seems like it could be a source of earnings power over the next 3 quarters.

Stephen C. Vaughan

Yes, Brian. As I mentioned on the call, we will manage that in accordance with the performance of our business. What we do is at the beginning of the year, we adopt an annual business plan where we plan out additional resources for the business. And then as the year progresses, depending upon how our business performs, we may add additional resources. And then of course, there's always the variable portion of our compensation, which is fairly significant, which is management bonuses and long-term incentive compensation that gets accrued based upon that performance. So that's really the primary reason for the difference in the first quarter versus our outlook going forward. But again, as the business improves, we do -- we would anticipate that, that would grow at a higher rate.

Operator

Next we'll hear from Jeffrey Bernstein with Barclays Capital.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

First just a clarification and then a question separately, the clarification just being on the earlier drink commentary and the competitive infringement. I didn’t know if you were implying that the drink business is holding up very well, and that it's the success of the breakfast business that's driving breakfast’s greater success or whether you do think there's some competitive convergence that is negatively impacting your beverage business. And then my question relates more to your fixed cost side of things. You talked about the labor efficiencies helping to protect the margin. I’m just wondering if you can give some of the specifics on that. It looks like labor wasn't very favorable in this first quarter. I’m just wondering what specific drivers you see to protect that restaurant margin the rest of the year and whether or not you might consider taking pricing above that 2% if necessary.

J. Clifford Hudson

So on the first part of your question, the challenge of looking at a variety of day parts and the – and trying to keep all of those elements moving, what we have found is as we divert resources, as we allocate resources towards promoting the morning hour, we moved the morning hour; we've moved it quite well this fiscal year. As we -- and in that process, we also take attention off of the -- off of Happy Hour. And so your question in terms of separating what influences that and are we able to influence it? I should probably phrase your question that way and answer that way, if it's okay. Are we able to positively influence afternoon with promotional activity, our Happy Hour afternoon activity? And the answer is yes, we are. As we divert resources or we allocate resources to our breakfast, we get a positive impact there. As we are not putting attention against the afternoon, we don't get as strong a performance. When we reallocate those dollars back to the afternoon, we get positive impact. The challenge for us at this point is to allocate or reallocate resources so that we can, in a relatively short period of time, be hitting all 5 day parts. This is what we're aiming toward.

Stephen C. Vaughan

I'll take -- sorry, I'll take the second part of the question, Jeffrey, as it relates to the labor efficiencies. We did see our -- if you just look at an actual dollar basis, labor costs declined by about $0.5 million year-over-year even though sales were relatively flat. And so I think from just a management perspective, we do believe that the reduced turnover that we're seeing at the manager level is helping us manage our drive-ins more efficiently as those managers get more experience and as we give them tools, they are scheduling more efficiently. Also, you mentioned what other opportunities we see to offset some of the cost pressures. We will continue to look for opportunities to take price. We won't announce that in advance, but certainly, as the spring months roll around, we’ll be evaluating that. And then I think also as I mentioned earlier, we do expect to see the cost pressures subside on the commodity cost fronts, and so I think that's another area that we won't be seeing the type of pressure that we saw in the first quarter that we expect in the second quarter.

Operator

Next, we'll hear from Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Steve, just to follow up on the food cost comments. You'd mentioned the new beef contract. And I think you mentioned -- I'm assuming you were referring to the food inflation rate slowing to a 2% to 3% rate. Is that correct? And if so, how does that compare to the first quarter and what you think you might see in the second quarter?

Stephen C. Vaughan

Yes. So in the second quarter, Joe, we had about an 8% food inflation rate. That was -- we're expecting to see somewhere between 7% and 8% in the second quarter. And then in the third and fourth quarters between 2% and 3%, so quite a bit of improvement if you look at it on a year-over-year basis.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

And just one more, if I can. To get to the debt-to-EBITDA down to 3x, how much debt do you think you'll pay down over the next 2 or 3 years?

Stephen C. Vaughan

Well, I think it really will depend on the performance of our business. Our objective is over that 2- to 3-year period, to get to a 3x leverage level, and so we can get there by paying down debt or by growing our EBITDA. And so to the extent that our business performs well and we grow EBITDA, we might not pay down as much debt. If it doesn't perform as well, we would probably pay down more debt with the intent of getting to that 3x level within that time frame.

Operator

The next question will come from John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

First, a follow-up. Just could you clarify how much weather may have impacted -- I guess November was a bad month, but could you just clarify it so we can -- we’re all trying to understand what the underlying run rate of the business is as you expressed confidence in sales improving and yet you’re facing tougher comparisons. That's the follow-up. And then do you need to spend more money on marketing? It seems like the problem is all day parts don't move in conjunction with each other. You spend on one and you lose it in another. Does that imply that you need to just spend more? And has that been a consideration?

Stephen C. Vaughan

So let me take the first part of your question, John. I think on the weather impact, what we saw was we actually had favorable weather in some markets, primarily in the East. But then in our core markets, in the South Central U.S., Oklahoma and Texas, was slightly unfavorable. Overall, we don't really believe that it had a meaningful impact on our overall system-wide same-store sales. But because our company stores are more concentrated in the South Central U.S., they did tend to get hit a little bit harder by that unfavorable weather on a relative basis. So that's -- it's not a meaningful impact when you look at the overall same-store sales for the quarter.

J. Clifford Hudson

And to answer the question regarding the marketing expenditures, the approach that we have taken to that in the recent past and we believe it's taking hold in the way that we're able to verify was by shifting our vendors that we're utilizing for marketing, for media purchasing. And the shift on that in the past year that occurred in 2011, we've been able to look at that more concretely and more completely as it relates to local network affiliates and the purchasing of media there. And we're confident that the dollars that we're spending where we have -- we did spend in 2011, just looking at calendar 2011 versus calendar '10, have been much more efficiently spent. We're getting more bang for the buck, so we're getting the effect of that. The national cable, we're not quite there yet because much of that was done by prior agency upfront by some time ago. So on a progressive basis here, in the coming months, we'll continue to get the effect of the buying power of moving to a bigger house, a purchasing house that is. But I think the opportunity that's there for us is perhaps more one of the nature of creative strategy, product promotion and day part promotion and a little less, for the moment, as it relates to media dollars.

Operator

Moving forward, we will hear from Will Slabaugh with Stephens.

Will Slabaugh - Stephens Inc., Research Division

On pricing, you mentioned you were at the 2% mark right now. Just curious if that's a level where you feel the most comfortable, if you expect that to change in the coming quarters. And then just as a quick follow-up there, wondered if you could give us some color on December sales.

Stephen C. Vaughan

Yes, so we -- on the pricing, we are comfortable at the 2% level today, but I think we will look for opportunities to take additional price in the spring time period. At this point, I can't give you a feel for what that level will be, but we will evaluate that and let you know as that occurs. I think the comment about December sales really...

J. Clifford Hudson

Well as far as we intended to go, which is to say positive same-store sales, 3 out of 4 months of the first 4 months of the fiscal year, which obviously included December, we wanted to give you that color in part because of the other changes we've announced today and to not leave that void there in terms of what December business was.

Operator

Moving forward, we will hear from Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Just a quick clarification on the marketing plan for the spring. I guess it sounds as if the primary impact is the media buying initiative and perhaps some change in the marketing message as well. But can you give us any color on kind of media impression year-over-year, how you expect that to be changing in the spring versus how it's been changing in the fall or winter?

Stephen C. Vaughan

Yes. So, Sharon, as it relates to the media efficiencies, as Cliff mentioned, the new agency, they are -- they just did the upfront buy on the national, so we don't have as much information on that. What we did get was some analysis of their buying at the local level. And I think we have communicated at some point a few months back that we expected to see somewhere in the neighborhood of 15% to 20% pickup in efficiency of our buying. And that is in fact, what they were able to deliver. So I think from a media impression, even though we are spending the same dollars, we're seeing a much greater efficiency of those dollars and expect to see improvement from that, particularly as we get a creative message that we feel like aligns with our day part strategies.

Operator

Next, we'll hear from Brad Ludington with KeyBanc Capital Markets.

John Dravenstott - KeyBanc Capital Markets Inc., Research Division

It's John Dravenstott on for Brad. You mentioned on the other OpEx increased credit card fees starting October 1. Are you referring to the debit card swipe fee legislation that went into effect there? And we're under the impression that, that was going to help restaurants. Is that the opposite case for you guys?

Stephen C. Vaughan

Yes, John, that was our original impression of that as well. Unfortunately, the credit card companies made a change to increase the minimum fee that they charged us on a debit transaction, and that turned into a higher cost for us as opposed to a saving. So with our average credit card/debit card transaction being in the $7 range and a lot of those being much smaller than that, that's the reason for that increase in cost.

Operator

Next, we'll hear from Keith Siegner with Credit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

One quick kind of clarification first. Last quarter, you talked about, I think it was in other operating expenses, you were going to have a one-time maintenance expense in the fiscal first quarter of 40 to 50 bps. Is that the tech support amount that you talked about within other, which you said should moderate over time? Or was it something different?

Stephen C. Vaughan

No, that's it, Keith.

Keith Siegner - Crédit Suisse AG, Research Division

That's it. Okay, and so it continues a little bit but not as meaningfully, is that right?

Stephen C. Vaughan

Well, we'll continue to have the credit/debit card cost increase going forward, but we do expect that the technology costs will moderate. It might be a slight increase going forward but nothing -- not in that 40 to 50 basis point range that we experienced in the first quarter.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. And the second question is for Scott. And most of the questions have already been asked, but I just wanted to ask about closures. Recently, there have been some -- there's been some press about some of the stores closing, some have been in new markets. The Eau Claire store had been open just over 2 years and it's already closed. Are you seeing more closures in some of the new markets? Was this something related to that? Was it an issue with franchisee? If you could just put a little bit of color on like what you're seeing in that? And if that store was indicative of any changes in the closure patterns? Anything along those lines would be great.

W. Scott McLain

Actually our closings, the first quarter of this year were significantly lower. We had 8 closings the first quarter of this year. We had 23 closings the first quarter of last year. And so if you look at each of the closures, they each have their own unique story. They're not all in new markets. They're not all in developing markets. They're not all in core markets. We do have a 57-year-old brand and so a lot of times, we've outgrown the trade area. One of the most encouraging things about the quarter that we talked about was the performance of our developing in new markets. And those markets have had very good performance over the last several months, and I think that bodes well for our performance in new markets going forward, and so we continue to have success. We are going to have closings from time to time. We may miss on a real estate side or for whatever reason but overall, the brand seems to be performing well in all kinds of markets. And our rate of closing, given our size, seems relatively low and very manageable.

Operator

Moving forward, we will hear from Nicole Miller with Piper Jaffray.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

It seems that you have a lot back in your control in terms of pricing and promotions, and obviously, you’ve talked about the economic backdrop. But one thing I was hoping we could get your perspective on was the competitive landscape. What are the changes at force there?

J. Clifford Hudson

I think, Nicole, you may have dropped off. Could you clarify that?

Nicole Miller Regan - Piper Jaffray Companies, Research Division

I apologize. I just -- I wanted to ask about the competitive landscape. So you touched on pricing and promotions being back in your control. You touched on the economic backdrop, and I was just working to ask about the competitive landscape in your perspective.

J. Clifford Hudson

I mean we operate in a very competitive industry, always have and it's still very competitive. And I think what we're trying to do, Nicole, is we're trying to position our brand to play to our points of strength and drive our brand across multiple day parts, which we've been very successful doing with a good media strategy, a good creative strategy and a good product strategy to support that and drive our business. So it is very competitive, but it's not more competitive today than it was 6 months ago or 12 months ago.

Operator

And next, we'll hear from Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group LLC

So my question is on the restaurant-level margin side. I know historically, you had talked about the ability to get back to a 16% to 17% restaurant-level margin. I guess my question is, do you still think that's achievable? And if so, what kind of comp do you think you need to start, I guess, moving the comps in that direction or the margins in that direction?

Stephen C. Vaughan

Well, Peter, we do still think that, that is achievable. We clearly had some pretty significant headwinds here in the short term with commodity cost pressures, but it does look like there's some good news on the horizon on that front. We believe that if those get back into a more normal inflationary level, 2% to 3%, that we’re -- if we're able to drive positive comps, we could start to see our margins actually improve again, but that's clearly in the short term. For the last -- this quarter we're just reporting, and then for our current quarter with the challenges we've got in the commodity costs, that's going to be more difficult. But longer term, we do think that 16% to 17% margin is achievable.

Operator

Moving forward, we'll hear from Matthew DiFrisco with Lazard Capital.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Most of my questions were answered, but I guess I'm just looking at sort of your pricing strategy. And I'm wondering how much have you seen as far as sensitivity? It seems as though, if you could mark down the date when you took that 1% price, but it looks as though you took it, and then actually your trends got better. Same-store sales-wise, I'd assume traffic. I'm curious behind that comp. Has traffic recovered as well? Or is it just the incremental of taking price that basically improved your comp in the month of December? Because I'm wondering if you have the ability to take more price to try and get us to some healthier margins on the restaurant level.

J. Clifford Hudson

Matt, I would say we are seeing our competitors be more aggressive on the pricing front. And so as Scott mentioned earlier, with this industry being so competitive, we are watching that pretty closely and we do believe that may open up some opportunities for us to take some pricing, and we will evaluate that in the coming months. So clearly, that is an option for us, and we'll look to exploit that if it makes sense for our business.

Operator

And moving forward, we will hear from Chris O'Cull with SunTrust Bank.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Scott, how are same-store sales trending in newer markets or in markets that are -- you consider underpenetrated?

W. Scott McLain

They're actually trending much better, Chris. And in fact, probably over the last 2 to 3 quarters, we've seen probably the best same-store sales in new markets since we've entered new markets in 2006. So we've seen some good momentum there in new markets and also some good momentum in our developing markets as well.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

What do you attribute that to? I mean I would think that, that would be difficult to build brand awareness in markets that may be underpenetrated. How do you -- what do you attribute that to?

W. Scott McLain

Well I think it's probably a combination of things. I think we are -- our media strategies have changed somewhat, which I think is helping developing in new markets. I think a lot of our stores have been there for a while now, so we're kind of over that honeymoon phase that sometimes impacts our comps. And then I think people are getting to know us better and we're seeing results in those markets. I think our operations have gotten better in developing in new markets. It's just a combination of the normal things that drive the business.

Operator

Next, we'll hear from Rachael Rothman with Susquehanna.

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

This is Jake Bartlett calling in for Rachael. I just had a question on your product pipeline. You had some success with the hotdog. I'm wondering what you have coming down the line, anything that can really move the needle here.

J. Clifford Hudson

Well we -- product news, new product news has always been a part of our brand and part of our promotional activity historically, and it will be going forward as well across a variety of day parts. For things we’ve not done historically is discuss what those will be before we hit the promotion point, which we do that –- or in which they’re rolled out. And of course, I don't think we’ve changed that now in terms of discussing future promotions. This month, we do have a differentiated product even in a month in which there's probably a higher sense of -- or sensitivity to value on the part of customers in the month of January. There is historically, and it makes as much sense it would be now if ever. And so we are focusing on a point of differentiation: chili and cheese on a variety of products, each priced at $1.99, small hamburger, a Coney or a Chili Cheese Tot. So you get a side order, 2 different entrées, $1.99. So we're still using points of differentiation even in a context in which there's the higher price sensitivity in the month of January versus other months. And in the coming months, we'll have variations on the theme by day part to attempt to drive the business. So this will continue to be part of our promotional strategy.

Operator

Next we'll hear from Bob Derrington with Morgan Keegan.

Robert M. Derrington - Morgan Keegan & Company, Inc., Research Division

Can you give us a little bit of color on the beef contract? The fact that you've locked it in, I think I heard you say for calendar '12, we haven't heard too many companies locking in beef for any extended period of consequence. And I'm just wondering from your view, what have you seen? Is the beef market loosening up? Are you feeling more comfortable? And how does your cost compare year-over-year specifically for that item?

W. Scott McLain

Well, Bob, we -- I don't know that we want to get into a lot of specifics about that. I can tell you that when we looked at the opportunity that the vendor provided us, we felt like that given the potential for beef costs going even higher, which there are a lot of reports out there that speculate that could happen, that we chose to go with making this more of a known quantity here. And the idea of having a set price for the next 12 months, we felt that would be good for our business, add some predictability to the business. But it will be still a slight increase year-over-year from what we had in place. But when you put that in the context of our overall product mix, that 2% to 3% inflation level for the third and fourth quarters, we feel like -- we feel good about.

Operator

Next we'll hear from Brad Ludington with KeyBanc Capital Markets.

John Dravenstott - KeyBanc Capital Markets Inc., Research Division

It's John again. Just wondering, how did you get to the 3x leverage target on your debt balances, given that last couple quarters, you've been saying about you have a strong balance sheet and you are well within your covenant range and you've got a couple years before major principal payments are due here? Just how did you get to that level?

Stephen C. Vaughan

Yes, John, I think a couple of things. One, we have had a higher leverage level over the past few years. I think given the volatility of our business and our desire to make sure that we maintain plenty of flexibility to execute our initiatives going forward, we feel like that 3x level is really just a better place for us to be. We may revisit that at some point in the future, but we feel like that over the next 2 to 3 years, given where our business is at, where the economy is at, that that's probably the most appropriate level for our company.

Operator

Next, we'll hear from Howard Penney with Hedgeye Risk Management.

Howard W. Penney - Hedgeye Risk Management LLC

My question actually is a philosophical one and one that I don't understand as not necessarily pertaining to your company but just kind of the industry practices in general. You'd say -- I know you've had an issue with price or at least the consumer value perception over the years, and you're talking about raising prices and there's some inflation that you have to protect against, I guess that. But why is it that -- why not just give up margin? Why raise price? Why take that price? Why run the risk of alienating consumers by taking price and not taking price and letting the customer judge where they want to go based on their value perceptions? And I mean, it’s just -- it's one of those questions that I really don't know if there's a right answer but I don’t know the dynamics of the business that much to say well I know you have to raise price, but you can protect margins. But if you protect margins, the consumers are not going to come because they don't feel like there's a value perception. So how do you think about managing that relationship? And then why not maybe lower margins to bring more customers in to get the same-store sales up, which seems everybody is so concerned about?

J. Clifford Hudson

Well the way we've done that historically is by focusing on product and service differentiation as opposed to simply price. So our -- for a long time, I'd say in the pre-recessionary environment, for a long time, this was almost strictly the approach that we took; product differentiation, made-to-order food, car hop service and focus, focus, focus. And rarely, sometimes we had promotions with prices in them, but often we did not have prices in the promotions. So it's just about the differentiated product. In this recession and I think everyone has become -- all the consumers have become more value-sensitive, and I'm using that in the broadest sense of the word. So we've attempted to positively impact the customers’ perception of our -- the value we offer by positively impacting the quality of the food that we're offering and improve the level of service and consistency of service in our business. So the larger part of the initiatives we have undertaken in the last 2 or 3 years through this recession really are less price sensitive. At the outset of the recession, we did much more in that direction. So in the last, I'd easily say 2 years, it has been not so much that direction. So at the same time, there is a point in time, depending on what happens with labor, commodities, et cetera, at which pricing is a factor that has to be addressed just from an operating product standpoint for our operators. And so we work to attempt to balance these 2 and balance one against the other and discuss it very openly and directly with our operators in an attempt to make sure that we can continue to drive their business in a positive way and not have price increase become a negative. So this -- the philosophical balance, or the philosophical juggling that you're describing, is one we've gone through historically, but we've had to get much more keen on the focus of this in this recessionary environment.

Operator

And we'll take our next question from Matthew DiFrisco with Lazard Capital.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

I was cut off. I was just trying to get in a last follow-up there on the pricing. Were the franchisees or have they begun to take more pricing? Are they taking greater than 2% right now? And then I'm just curious also as far as the timing or the cadence that we should expect a more differentiated approach towards the marketing campaign or maybe even a return to something that was somewhat successful in the past with the 2 guys in the car or something that's more unique to Sonic and the experience you have at Sonic.

Stephen C. Vaughan

Yes, so I'll take the first half, Matt. On the franchisee pricing, they have been a little more aggressive than the company, so they're probably running about 2.5% to 3% right now, so not a lot more aggressive but a little bit more aggressive.

J. Clifford Hudson

As it relates to the creative, that is a continuing evolution. You'll see -- what you're seeing in January to the extent you see it on national or local television, you'll see pretty much that for January and February in terms of style. And our anticipation is that March, April, you'll see an evolution of that. And so that's the time line, Matt, on which we're anticipating the evolution of that.

Operator

And that is all the time we have for questions. I'd like to turn the conference back over to Mr. Cliff Hudson for any additional or closing remarks.

J. Clifford Hudson

We appreciate your engagement today in this conference call. We hope that the information is helpful. And hopefully you picked up from the conference call, we have a number of initiatives in place which give us confidence and continue to build our business. And we believe in the coming months between a variety of product focus, media focus, creative, et cetera, that we have a basis for even greater optimism of the business, and we'll look forward to sharing that with you along the way. Happy New Year to each of you. We'll look forward to talk to you later.

Operator

And that does conclude today's conference. We thank you for your participation. You may now disconnect.

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