The word “value” came up 15 times during Sonic Drive-In’s first-quarter review Thursday afternoon. From McDonald’s new dollar menu to Taco Bell’s $1 Nacho Fries to Wendy’s expansion of its 4 for $4 lineup, this value-based race has defined quick service in recent days. But the question is: where does Sonic fit into the mix?
CEO Cliff Hudson said during a conference call that the 3,500-unit brand isn’t going to abandon its current strategy, which is value through differentiation. However, Sonic understands it might “have to modify tactics along the way.”
“There is that tension at all times of what is the price point in order to try to drive traffic in this value-sensitive time where competitors are very, very stuck on that—large competitors in particular,” he said.
Sonic beat Wall Street estimates in the first quarter, reporting fiscal 1Q profit of $11.4 million. The company had profit of 29 cents per share—a 4 percent increase from the prior-year period. Earnings, adjusted for non-recurring costs, were up 25 percent to 30 cents per share from 24 cents, year-over-year. These beat Zacks Investment Research predictions of 25 cents per share. Sonic also posted revenue of $105.4 million in the period, which came in under Zacks estimate of $106.6 million. Same-store sales declined 1.7 percent, including a 1.6 percent decline at franchised units and a 3.2 percent drop at company-operated stores. Five new restaurants opened in the quarter and Sonic repurchased 1.7 million outstanding shares. As of November 30, there were 228 company-run Sonics and 3,360 franchised restaurants.
Returning to Sonic’s value strategy, the chain featured its Carhop Classic, which cost $2.99 and included a cheeseburger and medium onion rings, from mid-September through November. For $3.99, Sonic now offers The Double Feature bundle meal, which began at the end of November. This includes a cheeseburger and small Classic or Master Shake.
While both price points are affordable, they are simply in a different tier than competitors’ dollar offers. Hudson doesn’t count that as a negative.
“I think this will help us, from an identifying characteristic, as to what it is we're offering,” Hudson said. “In other words, when you do a $2.99 deal and it includes these onion rings, freshly breaded onion rings, if that's appealing to somebody, there aren't a whole lot of places to run out and get that. So this is part of the strategy going forward of trying to focus and have elements that are included like that even though we have to be price sensitive.”
Sonic’s same-store sales consisted of positive check of about 1 percent offset by negative traffic. The company estimated that weather negatively impacted comps by 150 basis points in the quarter. Hudson said Sonic is seeing improvement in underlying traffic and that its same-store sales gap versus competitors has narrowed in recent weeks “as we continued to address kind of the value gap there between us and some of our competitors, but we're doing so with the stronger brand attributes in our promotions.”
In 2018, Hudson said Sonic will continue to reenergize its proprietary daypart offerings alongside product innovation. Again, continuing its positioning as a value-differentiator, not necessarily a price-point leader.
One example of this is the recently announced low-calorie Sonic Fizz. Starting at 99 cents during Morning Drink Stop, Sonic’s Fruit Fizz is a lightly sweetened sparkling water made with real fruit and no artificial flavors. Hudson added that a snack-focused pretzel stick would be coming down the pipe in the near future.
“Items such as these really highlight some of the better-for-you positioning we're moving to and affordable snacks that we believe can play well in kind of shoulder day parts, and they're good contenders against our competitors' cheap a la carte offerings,” he said.
“Rather than emphasizing a large range of deeply discounted value items or kind of a value menu approach, our focus has been, in the recent past and will be, on compelling price points, on core items that have broad consumer appeal,” Hudson added earlier in the call.
Sonic progressed on several other initiatives as well. The company shifted the majority of its national TV spots from 30-second ads to 15-second ads. “We're getting more for the same dollar,” Hudson said.
The brand is also planning to add new spokespeople to its campaigns, although it’s not moving away from the two-guy commercial it’s become known for, just “broadening our messaging capability and methodology,” Hudson said.
Another key growth area for Sonic is menu simplification. Hudson said the chain would continue pruning low-turning SKUs at stores, as well as pare down its drive-thru menu, remove sauces, toppings, and builds for LTOs. “You should see from us fewer promotions that do a better job of leveraging core products, and while at the same time, addressing evolving consumer needs,” he added.
Sonic expects 2018 to be the year it launches order-ahead functionality on its app. The pilot is underway and Hudson believes Sonic’s “drive-in store format and menu diversity is going to give us a distinct advantage in personalizing the experience for all Sonic customers.”
Franchisees are still in the process of activating an inventory management tool that’s now part of Sonic’s new point-of-sale system. Hudson said company-owned stores generated 50–10 basis points of margin improvement in stores where it’s been implemented. Sonic is rolling out a fresh labor-scheduling tool as well. The web-based platform could save the chain another 50 basis points on labor costs, Hudson said.
In terms of development, Hudson said Sonic would continue to focus on a rebuild-relocation program, although the rate might slow down a bit from recent quarters.
“Our current area development pipeline is up 6 percent versus same time last year. So it's nice to see that incremental vote by our franchisees,” he said.
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