Sonic Corporation (SONC), McDonald’s Corporation (MCD): America’s Drive-In Is the Place to Be

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Sonic Corporation (NASDAQ:SONC) is known as America’s drive-in. The company operates over 3,500 restaurants in 43 states. The restaurant is known for its hamburgers, hot dogs, french fries, milkshakes and other Americana fare. It is best known for its food being delivered by carhops, whereby a waiter or waitress brings the food to the car, sometimes on roller skates.

Sonic Corporation (NASDAQ:SONC)

Latest quarterly results

For the latest quarter, earnings per share doubled from last year’s level. Earnings per share came in at $0.06 compared to $0.03 last year. Margins were better across the board as the gross margin was 50.5%, operating margin was 10.8%, and net margin was 3.2%. The company repurchased $6 million of its common stock and paid down $23.7 million in debt.

Outlook going forward

Where Sonic Corporation (NASDAQ:SONC)’s management is particularly focused is on cutting costs. The company is implementing a new point-of-sale and supply chain management system. These will work to improve profitability and margins across the board.

In 2015, Sonic Corporation (NASDAQ:SONC) will benefit as approximately 850 licensees will go to a higher royalty rate. This will be a significant contribution to earnings as the company doesn’t have to do anything to get this extra money. It will flow directly to the bottom line.

The company is also doing more to increase its brand awareness. Sonic Corporation (NASDAQ:SONC) is still not in every market and has significant room to grow. Consider that there are currently only five Sonic Corporation (NASDAQ:SONC) restaurants in New York, and that many people have never even heard of Sonic Corporation (NASDAQ:SONC) before. The company is looking to change that with its increased media buying. Now 70% of all ad-buys are on national cable. Before it was a 50-50 split with local television and radio.

To appeal to more potential franchisees, Sonic now offers a smaller building prototype that requires less of an investment. The new building design reduces non-land costs by 15% to 20%. Sonic also offers new franchisees an ascending royalty rate. The goal is to open more restaurants and get the Sonic concept into more markets. There are still seven states that don’t have a Sonic and the company wants to target potential franchisees in new markets.

To get the word out about becoming a franchisee with Sonic, the company will be at the International Franchise Expo at the Javits Center in New York. Many franchise opportunities are still available and the company is hoping to partner with franchisees that can bring Sonic to new markets.

To help boost sales in the afternoon, Sonic launched a “Happy Hour” between lunch and dinner. Sales are usually slow during this period and the company discovered that afternoon snacking is growing. The afternoon segment now accounts for 23% of Sonic’s revenue. Sonic advertises 1 million beverage permutations are available at its restaurants. These drinks are half-off during “Happy Hour.”

The competition

There is no shortage of competition for Sonic in the fast-casual restaurant space. Of course the biggest competitor for Sonic is America’s original drive-in chain McDonald’s Corporation (NYSE:MCD). McDonald’s Corporation (NYSE:MCD) is the world’s largest chain of hamburger fast-food restaurants and is on practically every corner in America.

Even though it doesn’t have room for expansion in the U.S. like Sonic, McDonald’s Corporation (NYSE:MCD) is a tough competitor in innovation. The company is continuing to improve its menu items and is rolling out its McCafe’s to capture the drink business. McDonald’s Corporation (NYSE:MCD) has also done a great job of luring the value-conscious customer into its restaurants with its “Dollar Menu.”

McDonald’s Corporation (NYSE:MCD) has been in a sales slump for most of this year. Things are starting to turn around, though, with same-store sales increasing 2.6% in May.

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