Sonic Management Discusses Q3 2012 Results - Earnings Call Transcript

Sonic (SONC)

Q3 2012 Earnings Call

June 20, 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

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Keith Siegner - Crédit Suisse AG, Research Division

John S. Glass - Morgan Stanley, Research Division

Will Slabaugh - Stephens Inc., Research Division

Michael W. Gallo - CL King & Associates, Inc.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Presentation

Operator

Hello, ladies and gentlemen, good afternoon, and thank you for standing by. Welcome to today's Sonic Corp. Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Ms. Claudia San Pedro, Vice President of Investor Relations. Please go ahead, Ms. San Pedro.

Claudia San Pedro

Good afternoon, everyone. We are pleased to host this conference call regarding results issued this afternoon for the third quarter of fiscal year 2012, which ended on May 31, 2012.

Before we begin, I would like to remind everyone that comments made during this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that at the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this afternoon and the company's annual report on Form 10-K, quarterly reports on Form 10-Q and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

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, June 20, 2012. The archive replay of this conference call webcast will be available through June 27, 2012. This call is the property of Sonic Corp. Any distribution, transmission, broadcast or 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 at (405) 225-4846 and we'll make the appropriate arrangements to answer your questions.

With that out of the way, 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 phone. We appreciate your engagement with us today and appreciate your interest in our third quarter results and the current business performance. As you saw from the earnings release we put out earlier today, our system wide same-store sales for the quarter increased 2.8%. I would add a little color commentary to that number, we're particularly pleased with it given that our third quarter results this quarter ended May are lapping over a very strong prior year period when we introduced very successfully, the 6" All Beef Hot Dogs to our menu March and April of 2011.

It's also the second consecutive quarter we saw the same-store sales growth following the 3.5% increase we reported in the second quarter, and of course, positive same-store sales fiscal year-to-date as well. Our view is that these results reflect improvements in a number of things in our business: The food quality that we offer our customers, the service that we offer, each of these having been implemented over the last 2 to 3 years, as well as our customers’ corresponding improvement in their perception of our food, our service and the value that we offer, a very quantitative feedback that we've had from our customers over time. And this has been complemented more recently with the layered day-part promotional strategy, and I believe we're seeing a more effective creative format in our television advertising as well. So these elements now remain in place as we go forward and give us confidence that we can sustain positive same-store sales as we move forward.

On that point, same-store sales are the foundation of our multilayered growth strategy and we believe that positive same-store sales in combination with other elements of our business can lead to consistent double-digit earnings growth rate. The third quarter was a good example of this with a 14% increase in earnings as we had moderate single-digit same-store sales led to an improvement in operating margins and higher franchise revenue as well. So a further benefit from our -- in the quarter, further benefit from our use of excess cash flow for share repurchases.

On that last point, we completed our $30 million share repurchase program in early June. We repurchased more than 4 million shares, which represents -- from the beginning of the fiscal year, represents more than 6% of the outstanding shares. We continue to -- we will continue to generate strong free cash flow. And so, over time, we'll continuously evaluate our options for the best use of our capital, whether it is in various ways of investing in our brand, repurchasing shares or paying down debt.

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