Sonic Earnings: Robust Revenue And Net Income Expansion, But A Lousy Balance Sheet

Summary

• Robust same store sales expansion contributed to revenue and net income expansion.
• Franchisee royalties contributed the most to overall revenue gains.
• The spread between operating income and interest expense is uncomfortably thin.

On Jan 6, drive-in restaurant chain Sonic (NASDAQ: NASDAQ:SONC) came out with its Q1 FY 2015 earnings announcement. The company performed well on the revenue and net income front. However, it still has room for improvement on the balance sheet aspect. Let's take a look to see what's going on with this company.

Robust increases in revenue and net income

Sonic saw its revenue and net income increase an incredible 10% and 23% respectively in the most recent quarter vs. the same time last year. Franchisees led the way growing their same store sales a robust 8.5% vs. 2.3% the same time last year. Franchisees also contributed $7 million, or 53.3%, of the overall revenue gain (see table below). Company stores saw same store sales increase 7.9% vs. 1.9% the same time last year. Location number remained even with the same time last year. However, it's good to see the company focusing on bringing customers through the doors of its established network of stores which can have a meaningful impact on a company's financials.

Sonic Sales Breakdown
	3 Months Ended 11/30/14	3 Months Ended 11/30/13	Total Gain	% of Gain
Company Drive-In Sales	$100,138	$93,499	$6,639	50.3%
Franchise royalties and fees	$38,264	$31,221	$7,043	53.3%
Lease revenue	$1,065	$886	$179	1.4%
Other	$389	$1,046	-$657	-5.0%
Total Revenues	$139,856	$126,652	$13,204	100.0%

Click to enlarge

Source: Company Earnings announcement

Revenue gains outpaced the gains in expenses which resulted in the robust expansion in net income. Moreover, interest expense declined 1.6% serving as a small contributor to the net income expansion.

Balance sheet still debt laden

Sonic's balance sheet remains debt laden. The company has reduced its long-term debt a meager 0.57% year over year. Currently Sonic's $425 million in long-term debt equates to an incredible 692% of stockholder's equity. Long-term debt creates interest which chokes out profitability and cash flow. I prefer to see companies keep long-term debt at less than or equal to 50% of stockholder's equity. Operating income exceeded interest expense by a meager 3.6 times in the most recent quarter. The rule of thumb for safety lies at five times or more.

Sonic's $45 million in cash equates to 74% of its suppressed stockholder's equity. Normally I approve of companies with cash amounting to more than 20% of stockholder's equity. However, in this case assets minus a large liability equal a miniscule stockholder's equity balance.

Dividends

Sonic does pay a dividend. Currently, the company pays its shareholders $0.09 per share per quarter representing 50% of its diluted earnings per share. The annual dividend rate amounts to $0.36 per share per year yielding 1.4% annually.

Looking ahead

Sonic's management is upbeat about its prospects for FY 2015. It expects same store sales to register in the positive low single digit range. It expects company same store sales to start doing better than the franchisees due to the implementation of digital menu boards (improving visibility and customer engagement) and an upgraded point-of-sale system.

I think that investors should stay away from this company until it pays down some more debt. Finally, the company trades at a high P/E ratio of 32 vs. 19 for the S&P 500 and 26 for its five year average making it overvalued.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Comments

[30372955]

Thanks for the informative article. I was disappointed when our local Sonic closed. I'm glad to see you mention that their number of locations has stabilized. I noted a lot of closures 1-2 years ago when I was traveling.

[Keith001]

i go to Sonic often.. good simple food and service,,,no complaints.