Sonic (SONC) Q2 2012 Earnings Call March 21, 2012 5:00 pm ET 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 Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division Brad Ludington - KeyBanc Capital Markets Inc., Research Division Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division Keith Siegner - Crédit Suisse AG, Research Division Phan Le - Lazard Capital Markets LLC, Research Division Will Slabaugh - Stephens Inc., Research Division John S. Glass - Morgan Stanley, Research Division Presentation Operator
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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, March 21, 2012. The archived replay of this conference call webcast will be available through March 28, 2012. This call is the property of Sonic Corp. Any distribution, transmission, broadcast or a 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, area code (405) 225-4846, and we'll make the appropriate arrangements to answer your questions. We also want to note that due to an error from Business Wire, the original release issued at 4:01 Eastern Time was incorrect. The corrected release has been posted. With those announcements, 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 line with us this afternoon. We appreciate your joining us today for this conference call, and appreciate your interest in our second quarter results and our current business performance. As you saw from the earnings release, our systemwide same-store sales for the quarter increased 3.5%. We were pleased with this improvement in sales that we experienced in the quarter and believe it reflects the changes we've implemented with respect to a variety of aspects of our business, layered pricing, improved service, improved products, and so on, in the last year and more. We think it's worth noting that we've seen positive same-store sales now for fiscal year 2011. We finished last August and we've seen positive same-store sales for the first 2 fiscal quarters of fiscal year 2012. As you might have expected, we benefited from warmer temperatures in many of our markets throughout this quarter and in February. This temperature benefit was particularly true in January and the early part of February. At the same time, it's fair to say that some of our core markets experienced more typical winter conditions during December, then also in the second half of February. So mixed weather at times throughout the quarter. Also, the additional day in the leap year in the month of February did contribute about 1% to our positive same-store sales. Notwithstanding this warmer weather and the benefits of leap year, same-store sales continue to improve on both a 1 and 2-year basis. So we're glad to see this positive trend in the business.
Another positive aspect of this second quarter was restaurant-level margins, the performance, restaurant-level margins. Despite ongoing food and packaging cost pressures, the leverage from improved sales resulted in 70-basis-point improvement in restaurant margins. This improvement should give you a sense of the potential of increased operating leverage as sales continue to improve in our business. With food and packaging cost pressures subsiding in the latter half of the fiscal year, we're optimistic we'll continue to see improvement in this area of our business. Steve will provide more detail on that later in the presentation in a few minutes.Now looking at some other aspects of our business, in the latter part of -- so fiscal third and fourth quarters, fiscal 2012. As we move to this portion of the year, we're optimistic that our revised marketing strategies should position us to maintain positive same-store sales growth through the remainder of the year. First, and as a complement to the creative changes that you may have seen on national television this month, our switch last year from a regional to a national media buyer continued to result in improved quality of our media purchases, the quality of those purchases, as well as the increased cost effectiveness. So even with relatively constant media dollars this year, this improved efficiency has resulted in a step-up in terms of reach and impressions, and we expect this improved efficiency to continue through the remainder of the fiscal year. So nice positive impact from a media buying standpoint. As it relates to group media creative, so recent changes you would've seen, if you're watching television, was on the recent changes on television creative. So let me spend a little bit of time talking about the challenge of our previous creative campaign and why we've gone through this transition. To move our business forward from our viewpoint, we need a campaign that can promote all 5 day-parts in a relatively short period of time. The food-focused campaign that we've had in recent months really didn't present this because the length of time needed to have a commercial, single commercial, in the marketplace and allow for that one new commercial to be even recognized as a Sonic promotion, while at the same time getting the word out about that new product, it really did not have the flexibility of kind of moving across a variety of day-parts and messages. So that campaign was requiring longer promotional windows to get comparable brand recognition by customers and in turn, those longer promotional windows were unable, in a short period of time, to promote the same number of day-parts that we've been able to promote historically. So obviously, we wanted to get this in terms of the number of day-parts in a relatively period short period of time in order to keep positive same-store sales moving across a variety of day-parts. The fact is that this "Two Guys" format ends up being ideally suited to meet the needs of a greater number of short fuse promotions. Our research told us that they still have a very strong customer recognition and customer appeal. So when we had tested this format in limited market application, we were pleased with the customer reaction and with the sales results. Our view is that this "Two Guys" format will promote -- will permit us to promote different products for different day-parts in a shorter period of time with a single campaign format. We expect this strategy to achieve a higher level of awareness of promotions and ultimately then result in increased traffic in a shorter period of time than the other creative format permitted. We moved to this creative format utilizing social media in February and then at the end of February, 1st of March, began using it for television creative as well. Read the rest of this transcript for free on seekingalpha.com