Sonic Management Discusses Q3 2012 Results - Earnings Call Transcript

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

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

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

Keith Siegner - Crédit Suisse AG, Research Division

John S. Glass - Morgan Stanley, Research Division

Will Slabaugh - Stephens Inc., Research Division

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

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

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Sonic (SONC) Q3 2012 Earnings Call June 20, 2012 5:00 PM ET

Operator

Hello, ladies and gentlemen, good afternoon, and thank you for standing by. Welcome to today's Sonic Corp. Third 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 third quarter of fiscal year 2012, which ended on May 31, 2012.

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 at 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, June 20, 2012. The archive replay of this conference call webcast will be available through June 27, 2012. This call is the 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 one hour. If we have not gotten to your question within that hour time slot, please contact me at (405) 225-4846 and we'll make the appropriate arrangements to answer your questions.

With that out of the way, 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 to all of you on the phone. We appreciate your engagement with us today and appreciate your interest in our third quarter results and the current business performance. As you saw from the earnings release we put out earlier today, our system wide same-store sales for the quarter increased 2.8%. I would add a little color commentary to that number, we're particularly pleased with it given that our third quarter results this quarter ended May are lapping over a very strong prior year period when we introduced very successfully, the 6" All Beef Hot Dogs to our menu March and April of 2011.

It's also the second consecutive quarter we saw the same-store sales growth following the 3.5% increase we reported in the second quarter, and of course, positive same-store sales fiscal year-to-date as well. Our view is that these results reflect improvements in a number of things in our business: The food quality that we offer our customers, the service that we offer, each of these having been implemented over the last 2 to 3 years, as well as our customers’ corresponding improvement in their perception of our food, our service and the value that we offer, a very quantitative feedback that we've had from our customers over time. And this has been complemented more recently with the layered day-part promotional strategy, and I believe we're seeing a more effective creative format in our television advertising as well. So these elements now remain in place as we go forward and give us confidence that we can sustain positive same-store sales as we move forward.

On that point, same-store sales are the foundation of our multilayered growth strategy and we believe that positive same-store sales in combination with other elements of our business can lead to consistent double-digit earnings growth rate. The third quarter was a good example of this with a 14% increase in earnings as we had moderate single-digit same-store sales led to an improvement in operating margins and higher franchise revenue as well. So a further benefit from our -- in the quarter, further benefit from our use of excess cash flow for share repurchases.

On that last point, we completed our $30 million share repurchase program in early June. We repurchased more than 4 million shares, which represents -- from the beginning of the fiscal year, represents more than 6% of the outstanding shares. We continue to -- we will continue to generate strong free cash flow. And so, over time, we'll continuously evaluate our options for the best use of our capital, whether it is in various ways of investing in our brand, repurchasing shares or paying down debt.

We expect the double-digit earnings growth rate to continue in future quarters with near-term benefit from same-store sale, from margin expansion just as you saw this most recent quarter and the effective use of free cash flow. Over time, we also expect our ascending royalty rate that you have known with us for all the years we've been a public company, that ascending royalty rate and new store development will play a larger role in earnings growth over time.

Over the last few years, we've experienced -- we've expended, I should say, considerable effort toward improving the fundamentals of our business. And these include things like the introduction of new customer feedback tools, which our operators have used to markedly improve customer service levels, according to our customers. Also, product quality improvements, the items representing more than half of our sales at the average drive-in and improvements in our approach to pricing, including promotional activity, menu makeup and product development. The customer feedback tools I referred to have told us over time that these efforts have resulted in the strong increase in our customer's perception of the value of what they receive when they come to a Sonic drive-in.

In the recent past, we've also added additional marketing talent inside and outside our company to better leverage marketing resources available to us. This has included a new media buying agency in the last year that really has much more significant buying power than our prior agency. And it's allowed us to be a lot more effective with our media dollars and should provide some good efficiencies moving forward as well.

Now we've grown our business over time by successfully growing each of our day parts. In contrast to many of our competitors, this is really a critical element in driving consistently positive same-store sales, given that half of our sales occur outside of lunch and dinner. This became more challenging during the recession as we needed to improve some core elements of our business such as food quality and customer perception of value.

We found that without regular promotions for each day part as we focused in the recession on different elements of our business to try to rebuild perception of quality, et cetera, as we did not focus on the day parts, we would lose ground on those day parts which we are not focusing, which was quite different from the pre-recession days when many of our promotions had a nice halo effect across multiple day parts.

This immediate past quarter, this third fiscal quarter ended May, the promotions reflect that multi-day part promotional strategy, this 5-day parts that we grow our business from more significantly than our competitors. So multi-day part promotional strategy, we have products and promotions across all day parts during that quarter. These included things like the successful relaunch of Popcorn Chicken, which nicely drove lunch and dinner; the promotion of Happy Hour, including Happy Hour All Day on Tax Day, April 17th; the promotion of Sweet Potato Tots, this helped check in multiple day parts, including the afternoon with Happy Hour; our ongoing promotion of our breakfast day part with the new line of premium breakfast burritos. And then in the latter part of the quarter, the focus on Real Ice Cream; and in the month of May, and specifically, an after 8:00, half-price shakes promotion to drive the evening business.

So as you can see multiple products across multiple day parts, really, in a far more effectively way than we have had throughout the recession and something more akin to the promotional mix that we had pre-recession.

So these 2 guys that you see pictured here, we're glad to have them with us, and we're glad to have them back. Because the need to promote across several day parts in a short period of time has been a critical factor in our decision to return to the "Two Guys" format in this third quarter. When we begin testing this, we found our customers still had eye awareness of the "Two Guys" and they saw them as instantly recognizable and this associated with them with Sonic. And our view was that we needed to have more day part promotions in a shorter period of time. That's exactly what -- moving forward, what the "Two Guys" would permit us. And this is -- at the end of February, really the March timeframe promotion, this is when we moved to it. We saw a solid rise in advertising awareness and immediate on the introduction of the "Two Guys" versus the previous months. So we are confident that the recognition of them helps us rotate promotional activity more frequently than we were able to do without them.

Now keeping in this day part approach in mind, our promotional strategy in the fourth quarter, our summer quarter here, should feel very similar with the continuation of half-price shakes after 8:00 through the summer, including offering this special deal that is half-price shakes all day today, the longest day of the year, celebration of summer solstice. So this should be a nice day for our customers and a nice day for Sonic from a traffic and sales standpoint. The promotion that we are engaging in right now is complemented by new flavor news coming out for our 6" Hot Dogs, as well as, as December progresses, the promotion of new Island Breeze Slushes and ongoing promotion of the breakfast day part as well.

We'll have new product news that will touch all day parts throughout the summer and into the fall and beyond. So this is a strategy that has worked for us historically and worked for us extremely well in the third quarter. As a matter of fact, if you go back to the winter quarter, we’ve had promotions focusing on 4 different day parts, 5 day parts going into the spring. And then you'll see this recurring fourth quarter and then into the fall as our new fiscal year begins.

The multiple day part promotion, what we consider to be relevant, very relevant compelling products, tied with effective television creative, is the large reason why we achieved 2 decades of positive same-store sales growth prior to recession. And in our view, it's a large reason why we're able to have positive same-store sales in the third quarter on top of strong positive same-store sales a year ago as well, and the most fundamental reason we're feeling better about sustaining positive same-store sales ongoing.

Our business model should allow us to translate those positive sales into consistent double-digit earnings growth as we leverage the other elements of our multi-layered growth strategy, including in the near term, greater store level profitably, increasing franchising revenue and continued use of free cash flow. And in the midterm, increased development as well.

We're also of the view that we'll benefit from other initiatives we have underway, including rollout of our new point-of-sale system next year and beyond, that should facilitate further margin improvement for all operators in our system. In addition, as we've talked about more recently, a new small building prototype, that in combination with rising sales and profit, should really help us improve new store return on investment and stimulate development activity.

The general economic and consumer conditions that we've all dealt with through this recession will be a variable always and with the good -- significant variations for some time to come. But at the same time, we are of the view that we're much stronger today than we had been in several years and we're optimistic about the future of our brand.

With that, I'm going to turn it over to Scott McLain, who will give you an update on our franchising revenues and development activities. Scott?

W. Scott McLain

Thank you, Cliff. Our core franchise business remains solid as evidenced by the increase in franchise revenue we saw during the third quarter and the first 9 months of fiscal year 2012. While the benefit of our ascending royalty rate has been constrained by development incentives, as well as our efforts to assist some of our more challenged markets, positive same-store sales translated into $800,000 in additional royalties for the quarter and $1.3 million for the first 9 months of the fiscal year. That incremental revenue is a strong factor in our earnings growth as there's little incremental cost associated with that additional revenue.

The impact of the development of work-out incentive programs will continue to be at play during the coming year and will impact the royalty rate in the near term. But we continue to expect positive same-store sales to produce increases in royalty revenue. Over time, we expect these franchisee incentives to yield long-term rewards with increased brand penetration and improved sales, ultimately resulting in an ascending royalty rate as volumes continue to grow and some of our older license agreements convert to a higher rate in the future years.

Along those lines, we've seen much improved same-store sales performance in both new and developing markets, which we believe is the result of our emphasis on service and product improvements, combined with improved media efficiency, including more balanced spending between national and local media.

We were also pleased to see a nice benefit during the third quarter from our joint venture investment with franchisees on approximately 100 drive-ins in which we retained a minority interest in the real estate. Our share of earnings from these joint ventures and lease income should continue to grow in the future, further adding to our returns from the franchising side of our business. Our franchisees opened 7 new drive-ins during the third quarter. And as of the end of May, we had 3,550 total drive-ins operating in 43 states.

Looking forward, we continue to expect to open 30 to 40 new drive-ins this fiscal year. Year-to-date, we've closed 30 drive-ins, 9 fewer than were closed during the first 9 months of the last fiscal year. We continue to actively evaluate our lower-volume drive-ins. And looking ahead, we expect our number of closings to be on par with or slightly less than the prior year.

We're pleased that our sales and profit momentum has improved, which has helped to continue to increase our franchisees' overall confidence in the business. That confidence, together with return on investments, is the single biggest factor in their willingness to continue investing capital.

We also continue to focus on improving new store ROI through our small building prototype that reduces the cost of the building by about 15% to 20%. We're beginning to use this prototype in several new stores and we expect that this effort, in concert with rising sales and profits, will significantly improve our development pace over the longer term.

However, as we've noted before, given the 12- to 18-month development cycle, it will likely be several quarters before we begin seeing a market increase in new drive-in openings and for development to become a major factor in our earnings growth.

With that, 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 third quarter of fiscal 2012, we reported earnings per share of $0.24 compared to a loss of $0.08 in the third quarter of 2011. Excluding the charge recorded as result of our refinancing transaction in May of 2011, earnings would have been $0.21 per share in the third quarter of 2011. So on an adjusted basis, we achieved a 14% year-over-year increase in earnings per share. These solid results demonstrate our ability to grow earnings at a double-digit rate with moderately positive same-store sales leveraged from that sales growth in a normalized operating cost environment and effective use of our cash flows to enhance earnings growth. As Cliff mentioned earlier, we are pleased with our overall business trends. We believe the change in our creative campaign, the refinement of our promotional strategy, will yield improved and more predictable sales growth, and we continue to target low single-digit same-store sales increases going forward.

In addition, we are particularly pleased with the strong performance of our company drive-ins from both the same-store sale and a margin perspective. Overall, restaurant-level margins improved 140 basis points to 17%, reflecting leverage from improved same-store sales growth and a moderating commodity cost environment. This improvement in restaurant margins was a major factor in improved overall operating income margins at 170 basis points. These improvements in restaurant and corporate level margins demonstrate the potential to show significant operating leverage as we achieve positive same-store sales going forward.

Looking at each individual line item, food and packaging costs were favorable by 30 basis points for the third quarter. This improvement reflects moderating commodity cost inflation, effective management of food cost and pricing. During the quarter, we lapped over a 2% price increase at the company drive-in level and implemented a 2% to 3% price increase around the 1st of May.

As we noted earlier this year, we have locked in our beef cost for the remainder of fiscal 2012. As a result of our beef and other commodity contracts, we expect commodity inflation to continue at a moderate level of approximately 2% on a year-over-year basis during the fourth quarter. Accordingly, we are projecting slightly favorable food and packaging costs to continue into the fourth quarter of fiscal 2012.

Payroll and employee benefits, inclusive of non-controlling interest, improved 60 basis points from the third quarter as a result of leverage from higher same-store sales and improved labor efficiency, which would more than offset higher workers' compensation costs and unemployment taxes.

We also saw the benefit of higher operating volumes from other operating expenses, which improved by 50 basis points during the quarter. Looking forward, we expect to continue to see improvement in our restaurant operating margins dependent upon the degrees which same-store sales are positive. It is worth noting that historically, restaurant-level margins trend somewhat lower in the fourth quarter than in the third quarter, primarily as a result of increased utility cost associated with the hot summer weather.

Looking longer term, we believe we have an opportunity to drive incremental margin expansion with the implementation of a new point-of-sale system over the next few years. We plan to begin implementation of a new system in the fall and will accelerate the rollout to all company drive-ins with the goal of completion by the end of calendar year 2013. We look forward to providing more details on this implementation plan and its potential benefits on our year-end earnings call.

SG&A expenses decreased versus the prior year, reflecting a significant decrease in bad debt expense, partially offset by higher recruiting and relocation cost associated with upgrading of talent in our marketing and product development groups.

We are pleased that positive same-store sales have resulted in higher store-level profit for both company and franchise locations. This increase has translated into improved financial health for the part of our franchisees.

Our business model is first and foremost focused on franchising. As a result, we generate a significant amount of stable and predictable cash flow with only moderate capital needs. This gives us the flexibility to invest in our brand that meets our return on investment criteria, repurchase shares and pay down debt.

As Cliff mentioned earlier, we completed our $30 million share repurchase program in early June. We repurchased slightly more than 4 million shares, which represents more than 6% of our outstanding shares as of the beginning of fiscal year 2012. We expect these repurchases to be accretive to earnings and believe they are an effective use of our free cash flow.

Since 2/3 of these repurchases were completed in the latter half of the fiscal year, the accretive impact on Q3 and Q4 are greater than the impact on the entire year. Accordingly, the sum of the earnings per share figures for the 4 quarters will likely be $0.01 higher than EPS for the year.

This anomaly results from the weighted average shares outstanding for the year projected to be approximately 60 million to 60.5 million shares, while the weighted average shares for the fourth quarter are expected to be between 58 million and 58.5 million shares depending upon option exercises and stock price variations during the quarter.

In fiscal 2012, we project we will generate between $50 million and $55 million in free cash flow, which we define as net income plus depreciation, amortization and stock compensation expense less capital expenditures.

Looking forward, we will continue to use our cash flow to enhance shareholder value by investing in our brand with initiatives such as the replacement of our legacy POS system, repurchasing stock or paying down debt. As we have noted, our goal over the next 2 or 3 years is to reduce our net debt-to-EBITDA level to the 3x range through a combination of debt reduction and increased operating income.

We will continuously evaluate all of options to determine the best uses of our excess cash and which options will provide the greatest impact to shareholder value creation. We have a very solid balance sheet and continue to exceed our debt compliance covenants by a wide margin.

Looking to the fourth quarter, we expect positive same-store sales in the low-single digits range, approximately 15 to 20 new franchise drive-in openings, improving restaurant-level margins, the degree of improvement will depend upon the strength of same-store sales growth, SG&A expenses in the range of $17 million to $18 million, depreciation and amortization expense of $10.5 million to $11 million, net interest expense of $7.5 million to $8 million, a tax rate between 37.5% and 38.5% depending upon the reinstatement and employment tax credit programs and annual capital expenditures of $20 million to $25 million.

Now I'd like to turn the call back over to Cliff for some closing comments.

J. Clifford Hudson

Thank you, Steve. So prospectively, we expect our multi-layer growth strategy to drive double-digit earnings growth with the effective use of our creative promotional strategy, complemented by our strong foundation of improved service and product quality. And I think it's fair to say, with sustained same-store sales, we'll continue to benefit from our increasing franchise revenue, improved operating margins and new unit development, and as Scott referred to earlier, aided by our new building prototype. For the free cash flow this will help generate, we'll also have the flexibility to use our excess cash to invest in our brand, opportunistically pay down debt or repurchase shares to enhance our shareholder value.

So this concludes our prepared remarks. And we'd also be happy to respond to any questions you would have.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Jeffrey Bernstein with Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Two questions, just first on the comp side of things. Well, I guess 2 parts to this question, but you talked about I guess this fourth quarter kind of being in that low-single digit range or just probably similar to what we saw in the third quarter. I know to compare these 400 or so basis points, I'm just wondering if perhaps that's conservative or perhaps there's some unusual benefits in the third quarter that are not likely to recur. I mean, it sounds like you're fairly bullish though there's no mention of caution in the current macro environment or whatnot, so just wondering your thoughts near term as it relates to comps. And then I had a follow-up.

J. Clifford Hudson

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

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

But there doesn't seem to be any sign of or anything you can see in terms of macro having a negative impact there or perhaps an increase in competitive discounting or promotional activity?

J. Clifford Hudson

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

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. And then just a follow-up question as it relates to the franchisees, potentially reaccelerating their unit growth. I know in the past, you've talked about 18-plus months or so once comps start to improve. It sounds like comps have now improved for the past few quarters. I think you changed the tone to be just over the next few quarters, you can see a reacceleration. I'm just wondering obviously with the lower investment cost as well helping, you're already seeing the demand for that and people are starting to get the real estate and get permits and you would expect that uptick over the next few quarters? What kind of pace of growth should we assume starting a few quarters from now once the franchisees have the ability to restart the pipeline?

J. Clifford Hudson

Well, I think our franchisees are confident their business is certainly increasing, their sales and profits are increasing. And I think the smaller building gets them increased confidence that they can get an ROI, whether -- but I don't expect over the next that you will see that manifest itself from store openings over the next 2 quarters. I mean, it does take considerable time to go out find real estate, go through the permitting process, that can be a very extended period of time depending on the market that we're talking about. But in general, our franchisees' confidence in the business is good. And their prospects for ROI are getting better with the smaller building. So that, our view is for strong development in the future. I can't pinpoint exactly when that will be, however.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

But you would expect a meaningful uptick in terms of growth maybe 1 or 2 years out from now?

J. Clifford Hudson

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

Operator

We'll take our next question from Brian Bittner with Oppenheimer.

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

So just given that it is a real intense environment out there and given that your business is heavily driven by the success of promotions and will likely continue to be, can you just dive a bit deeper into your high confidence level here for a sustainable turn towards positive comps past the fourth quarter? Maybe talk about how deep the pipeline for promotional activity is, how far it is planned out and maybe add some color on why you do expect it to be successful.

J. Clifford Hudson

Well, one of the things that I made reference to and I think maybe Steve may have referenced to in his comments as well, we have made investments in people inside and outside the company in the last year and more beyond where we have been prior to that time. And some of those are incremental positions, some of them are a shift in talent. I can say that the internal processes for the product pipeline have improved in the last year. And both the strategic focus as well as the level of activity and the quantity in the pipeline and the stepped-up testing all have improved over the last number of months. So with that tied to having greater confidence in moving toward as we had prior recession, multi-day part promotional activity and having a creative format, i.e. the "Two Guys", that really permits us to do that in a 3-month period, meaning a quarter. In other words, really as recently as last fall and summer, with new -- attempted new creative, we were elongating promotions simply to get awareness of a specific commercial and/or type of campaign. By going back to the "Two Guys" and now I should say moving forward with the "Two Guys", we have had immediate recognition and the ability to integrate that campaign, the "Two Guys", across multiple day parts and so run -- we're on a greater variety of commercials in a shorter period of time because they're all introduced with the "Two Guys", with the pipeline improving product development, products across multiple day parts. So I don't know that there's a way to quantify it for you and any attempt to would require us to go into day part strategy and product pipeline that I really wouldn't even care to go into for confidential promotional activity purposes.

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

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

J. Clifford Hudson

Well, we did a couple of different things. Number one, we offered some development incentives. And then we had some relief that was associated with some of our more challenged markets. And we did get some benefit from those incentives in terms of development that would not have occurred otherwise. And some of those challenged markets have really helped them and they are now performing much better. Those are going to continue to be a play for a while. But I think as we continue to drive positive same-store sales, we will see our royalties grow. The nominal amount of royalty income will grow every quarter and the royalty rate should pick up over time, particularly in 2014 when we have about 900 license agreements that are scheduled to convert to a higher rate beginning then. So that will be another factor that causes the royalty rate to go up.

Operator

We'll take our next question from Keith Siegner with Credit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

Just a couple of quick questions for Steve actually. First, the CapEx guidance came down a little bit. Just wondering if you could put a little color behind what maybe those adjustments were.

Stephen C. Vaughan

Well, we -- it doesn't look like we'll open as many company-owned drive-ins as we have -- originally, we had talked about opening 3. That pipeline has just not moved along as quickly, Keith, as we originally anticipated. So we will likely open one company -- new company drive-ins at the end of the fourth quarter. So that's the primary reason it's come down a little bit. I believe we ended the third quarter with our year-to-date CapEx at about $13 million. That does not include the $3.5 million purchase of an intangible. So if you add that in, it's about $16.5 million. But we do anticipate we'll step up our spending a little bit in the fourth quarter, but the -- in that $20 million to $25 million range.

Keith Siegner - Crédit Suisse AG, Research Division

To carry that then a little bit into next year, you talked a little bit about -- or Scott talked a little bit about the pipeline for franchisees. Do you anticipate getting back to opening many company-operated units over the next couple of years, even if under any scenario, does that ever get back above a 5 or 10 number? Or is that probably going to stay low?

Stephen C. Vaughan

I think, right now, we are definitely seeing increasing confidence in our company-owned drive-ins. We saw the same-store sales of our company drive-ins were higher than the system. We saw very good flow-through. And really, I think what it will boil down to is our confidence in our ability to get a return on investment. So to the extent that we can continue to see improvement in sales and operating margins at the company drive-in levels, you could see that at some point in the future pick back up. That's not planned in the near future, but it's certainly an option that we'll consider.

Keith Siegner - Crédit Suisse AG, Research Division

And then just one clarification question on the G&A. The bad debt expense, Steve, was there any true up involved in this or is this more reflective of what the ongoing run rate might be given recent improvements in collections?

Stephen C. Vaughan

It's probably more reflective of the ongoing run rate. We actually had a slight amount of bad debt expense in the quarter. So it wasn't where we actually took a credit, if that was your question. But it's come down significantly again because our franchisees, generally speaking, are making quite a bit more money than they were last year.

Operator

We'll go next to John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

First, just on the new advertising and bringing back the "Two Guys". Would you remind us why you went away in the first place? Is there -- was the efficacy at that point waning or was there maybe some other issues? Why did you leave it and is there potential reason that, that would reoccur overtime going forward?

J. Clifford Hudson

Okay, so at the time, I think 2010 was the last time we ran it, sometime in 2010 was the last time we ran one of the "Two Guys" commercials. So recession setting in, 2008 moving into '09, obviously, business for us and for many of us was not working too well at that time. That question, the difficulty in ascertaining, what is working, what's not working? So we, John, as you probably recall, started making a number of moves to attempt to move the business to another level. And along the way, did come to the conclusion that perhaps the "Two Guys" were a tired element of our promotional activity. In fact, though, over time, you will recall that we made a number of product quality upgrades, customer feedback processes that we had not had in place historically and we really didn't begin those until the recession began. Had we had those in place a couple years before the recession, had a run rate on that kind of feedback, we probably could have isolated some of our problems and even avoided some of our problems. As the recession came on challenging as it relates to how challenge is as it relates to how we should be thinking about pricing in our promotions, as we should be thinking about pricing on our menu and the latter pricing, as to how we should be thinking about building new customers, rebuilding customers' perception of value, having a better customer feedback before the recession would have helped us focus probably on these things more intensely even before the recession and avoided some of the pain we had. Without that kind of 3D sort of picture about what was going on in the market and with our customers, we made moves in a number of areas of our business to attempt to improve the business. One of those was that the attempt in change of creative to try to, break through to the consumer more effectively. The other paths that we pursued, we were not satisfied with. And even to the extent that we hit on something that worked as an example, obviously, the food-only creative with the hot dogs 15 months ago, March of '11, obviously, that broke through quite well and drove quite a bit of traffic and sales, incremental sales. But over time, using that, even that strategy, food-only, the food-only creative, every time you switch to a different promotion, the question came up with the consumer, "Who is this? How do we figure this out?" as the commercial progresses. This is why we came up to a point where we said, "This was the beauty of the "Two Guys" that -- and that is that you start a commercial, any commercial, with the "Two Guys" and has wide recognition that it's SONIC." And so we came back to the viewpoint, we've improved the food, we've improved the pipeline of food, we've improved pricing strategy, we've improved service quality, we've improved media buying, which we did a year ago and more and getting the benefit of that still. But our sense was we weren't going to get, absent the passage of a good bit of time, we weren't going to get the benefit of what we have from the "Two Guys". Given that all these other things were kind of foundational elements have improved, our sense is the two -- sense was that the "Two Guys" have worked for us well. We did surveying of customers before we even got back out testing the "Two Guys." We did then test some old commercials just to go back in local markets to see how that would run. And it was very well-received. So we felt like there is plenty of upside and little downside going back to them and I believe the results of this past quarter bear that out.

John S. Glass - Morgan Stanley, Research Division

That's helpful. Separately, you talked about a new POS system and I know you're going to outline that more next quarter. But can you -- what is the scope of -- this is the customer facing POS system. Is there any sort of broad strokes you can talk about in terms of what gets changed from a customer perspective or what benefit maybe qualitatively, maybe not quantitatively, you expect from those?

J. Clifford Hudson

John, I think that the POS system is really inside the restaurant, not really as much customer facing. So it will help our operators in particular on the labor front with the deployment of labor and other areas inside the house to make them more efficient. But if I understood your question right, that will be the primary benefit as opposed to customer facing technology.

Stephen C. Vaughan

Most of the benefits will really be indirect rather than direct.

J. Clifford Hudson

Right. We understand your question correctly?

John S. Glass - Morgan Stanley, Research Division

Yes, no, that's helpful. So in other words, with this, do you view this more as a cost savings that you can manage your labor better for example rather than increasing order counts? Is that the right way to think about it?

J. Clifford Hudson

That's correct.

Stephen C. Vaughan

Correct.

Operator

We'll take our next question from Will Slabaugh from Stephens.

Will Slabaugh - Stephens Inc., Research Division

Wonder if you could talk about the differences in company store performance versus franchise in the quarter, especially considering the 2-year comp for your company stores came in at over 10% versus franchise at, still strong, about 6.3%. And then as a follow-up to that, if you can work into that, if there's any variances that were meaningful in sales geographically.

Stephen C. Vaughan

Yes, I'll address the first part and then I don't know if anybody wants to jump in on the second part. Will, we, in terms of the company-owned drive-ins, as we've talked about now for several quarters, we feel like there's an opportunity there with the lower average unit volumes that are company drive-ins versus the franchise drive-ins. As we close that service cap that existed when we put these tools into place that Cliff talked about a little earlier, we have seen that gap closed and really a fairly consistent outperformance at our company drive-ins on the same-store sales percentage basis. We do still think that there is some opportunity there with the average unit volume gap still at, I think, approximately $65,000 to $70,000, still quite an opportunity. But certainly, in the third quarter in continuing that closing of the gap, it's something we would expect to continue going forward.

J. Clifford Hudson

And, Will, we really did not see any significant variation regionally on sales. Our business was strong everywhere during the third quarter in our core markets, in our developing markets and in our new markets. So that was one of the more encouraging things about the quarter, was sort of the broad-based success that the brand had everywhere we operate.

Will Slabaugh - Stephens Inc., Research Division

And just second for me on day parts. You did mention the strength across all the day parts in the quarter, I wondered if any one day part stood out more than the others? Or on the contrary, if you feel like one may require more media dollars credited toward it going forward to help it out?

J. Clifford Hudson

Well, the thing is the day parts vary by quarter and the 2 obvious variables are our area of focus in a given quarter and then second variable would be performance a year ago same quarter. So in a given quarter, we'll always have some day part working better than another. Then as we look prospectively on how to drive our business, we keep those kind of varying performances in mind. So it was a good quarter. When you get all 5 day parts working, things look good and feel good.

Operator

We'll take our next question from Michael Gallo with CL King.

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

Just a couple of questions. Commodity costs, would you expect a further easing in the fourth quarter? And also just a preliminary look on where you stand on commodities, the remainder of the calendar year and also on fiscal '13? And then I just have a follow-up question.

Stephen C. Vaughan

Yes, Michael, so we are expecting the year-over-year inflation in the fourth quarter will be real similar to what we experienced in the third quarter, which was about 2%. As we -- and we’ll give more color on fiscal year 2013 when we give our outlook usually in early September. But I will say, at least for the first quarter of fiscal 2013, the September, October, November quarter, we would expect to continue to see very moderate commodity cost inflation. So on that front, certainly good news.

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

Second question I have was the share repurchase completed, is there a new Board authorization? Something you expect to occur shortly? And then also, what was the quarter-end share count or not the quarter end but just the current share count?

Stephen C. Vaughan

Okay. So the expectation for the fourth quarter is that we will have between 58 million and 58.5 million shares outstanding on a diluted basis. So that includes the dilution from stock options. In terms of additional share repurchases, we'll continue to evaluate that along with our Board. And as the business performs and as we generate additional cash flow, we will announce as developments warrant.

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

And then just a follow-up question on the new store prototype, I was wondering how many stores you actually have opened under the new store prototype and just what are you seeing in sales of those stores relative to system averages.

J. Clifford Hudson

Well, we currently have 4 of those drive-ins open. We have number that are scheduled to open over the coming months. But the sales, the ability to handle sales in those drive-ins appears to be strong. We've got stores that have opened that have had really strong opening weeks of over $100,000 of sales in a single week and then been able to handle that business with no problem. The actual building size that we're using for the small building prototype is the same size as a number of buildings, which we already have in our system. And we run over $2 million in some of the drive-ins that use a building of the same size. So we feel like our ability to achieve throughput through the small building is not impaired at all.

Operator

We'll take our next question from Matthew DiFrisco from Lazard.

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

I just want to go back to looking at the comp. Can you tell us what the price was or the average check was in the just-reported quarter?

J. Clifford Hudson

Yes, we were running about 2% to 2.5% of price. And that was roughly what the average check increased. So we -- traffic was relatively constant with last year for the quarter, which we were very pleased with given the fact that we have been promoting a more of a value item, the $1.99 hot dog introduction. To be able to maintain traffic and grow check and create positive sales is very encouraging, Matt.

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

And then you took a 2% to 3% price increase in May. Was that replacing one that rolled off?

J. Clifford Hudson

It was. And that was at our company drive-ins. Our franchisees, I think, took a similar increase. But we were rolling over the pricing that we had taken at about 2% last year.

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

So I guess I'm just having a tough time seeing -- I just want to take into context your guidance for the low-single digit comp. I mean, I totally understand we're in a difficult economic situation and there's no reason to set the bar too high. But is this just the level of conservatism or have we seen a tangible slowdown? Because the 2-year comp trend that you're implying with that is pretty slow. And I mean, I appreciate the sense of setting the bar at the correct place it should be, but at the same token, I'm wondering if you're seeing any slowdown in the first weeks of June to indicate that we should see that much of a dramatic slowdown on the 2-year trend.

Stephen C. Vaughan

Well, I think we feel comfortable and confident that we can deliver low-single digit positive same-store sales and that's really what we're focused against. And we'll -- at the end of the fourth quarter, we'll talk further about fourth quarter trends but as you know, Matt, we want to look at our business over a longer term and not yet focused on very short periods of time. So we feel good about that target of low-single digits.

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

And just the last question. I was curious, has there been ever or where do we stand as far as some of Northeast progression and store development there? I mean, have there been some more -- what is the pipeline look for that and is there a potential Northeast-specific sort of prototype or northern prototype that might have a little bit more of a 3 season or somewhat of an enclosed patio or something of that nature that I think some of the select franchisees have thought about?

Stephen C. Vaughan

So, Matt, we are continuing to open up stores in the Northeast. In fact, our highest volume store this year has been a store in Long Island, which did almost $4.5 million in sales for the first 12 months it was open. So we continue to do well in the Northeast. We are looking with some of our franchisees that enclosed seating on some of the patios. And so we'll evaluate that and sort of see how that works and how that plays in to ROI over time. But in general, we were pleased with our performance in the Northeast and we're looking forward to building more stores there.

Operator

We'll take our next question from Joe Buckley, Bank of America Merrill Lynch.