Sonic expects big tax savings

The chain expects as much as a 10 percentage point improvement in its tax rate, thanks to reform.

Tax reform could lower how much Sonic Corp. pays the government by as much as 10 percentage points in the current fiscal year, executives said this week, helping fuel technology and labor-saving investments and perhaps new unit development.

Speaking on their fiscal first quarter earnings call on Thursday, Sonic executives said their tax rate will likely decrease from 35% to 25.7%—generally saying that taxes could fall between eight and 10 percentage points.

Claudia San Pedro, the Oklahoma City-based company’s chief financial officer, said on the call that the company is “in the process of completing a comprehensive analysis” of how the bill will affect other items.

She also said that the company is likely to invest the savings in labor and technology, areas Sonic is investing in already.

“We feel good about the investments we’re making,” San Pedro said. “We’re always continuously evaluating if there are other investments we can make that will achieve a good return.”

Tax savings could also help the chain’s franchisees, all of whom are independent, small or midsized businesses.

Cliff Hudson, Sonic’s CEO, said the company will have meetings with franchise leaders in a couple of weeks, and expects to encourage those operators to reinvest the savings in their businesses.

“They are independent operators,” Hudson said. “These are their profits. But it is our objective to try to show them their profits are best utilized” by investing back in the business.

“Historically, when we’ve had expansion of profitability at the store level, we’ve had considerable usage of that for drive-in expansion,” he said.

The tax savings come as the 3,588-unit chain is combating sales declines. Same-store sales declined 1.7% in the quarter ended Nov. 30. Executives said that average check increased 1%, meaning that traffic in the period likely fell 2.7%.

That was “lower than what we aspired to,” Hudson said. But he blamed much of the problem on weather, and executives said that same-store sales would have been flat in the quarter if not for bad weather in many of the chain’s markets.

Hudson suggested that sales improved in December, in the “decent low single digits,” after the first quarter ended, until Christmas. After the holiday, he said, weather got worse. Cold weather is typically bad for a drive-in chain.

“Once the weather turned frigid on a broad basis all bets were off,” Hudson said.

San Pedro also mentioned difficult competitive activity. Major competitors to the company, notably McDonald’s, Burger King and Wendy’s, have been aggressively pushing value and marketing their offerings, which is hurting sales at other burger chains.

To improve the chain’s sales, Sonic is working to simplify its operations and simplify its marketing.

The company has already started testing a simplified menu, which Hudson said includes a pared-down drive-thru menu and reductions in items that don’t sell well, as well as some ingredients, including some sauces and toppings.

The chain is also planning to do fewer promotions with “compelling price points.” The chain offered a $2.99 “Carhop Classic” in the quarter and is now offering a $3.99 “Double Feature.” The more simplified value offers have helped improve the chain’s value perception among consumers.

“That should be a positive leading indicator to continued improved traffic trends,” Hudson said.

Meanwhile, Sonic is planning to add order-ahead functionality to its mobile app this year. Hudson said the company believes the chain’s drive-ins could give it an advantage by helping “redefine convenience”

Hudson said the company is “well on our way with an order-ahead pilot” and expects to expand that test.

Net income at Sonic increased 4% in the quarter to 29 cents per share, from 28 cents in the same period a year ago. Revenue in the period declined 18.6%, to $105.4 million. The revenue decline was largely due to the sale of company-owned restaurants to franchisees.

Sonic stock declined slightly on Friday.

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