NEW YORK ( TheStreet) -- Sonic (SONC) has been a success story in the ultra-competitive burger business over the past year, but may soon confront a different environment as rival McDonald's (MCD) attempts to turn around sluggish sales.
"McDonald's is the 800-pound gorilla; when their business is off, it benefits the rest of us," said Sonic chairman, president and CEO Clifford Hudson in an interview. And boy has McDonald's business been off.
The Golden Arches U.S. same-restaurant sales fell 2.6% in the first quarter as it continued to battle negative public perceptions of its fast food and overcome operational missteps, such as having an overstuffed menu that led to delays in getting items to customers.
Last year alone, McDonald's saw a 2.1% drop in same-restaurant sales, with guest traffic falling a disturbing 4.1%. On the other hand, Sonic reported back in March that its fiscal second-quarter same-store sales rose 11.5% as customers continued to respond to the ability to customize their burgers, as well as Sonic's creative menu items. The chain will report its latest financial results on June 22.
Over the past year, Sonic's shares have gained 42.2% compared to a 4.8% decline for McDonald's.
The prolonged sluggishness sales at McDonald's has sent its new CEO Steve Easterbrook off to orchestrate a series of initiatives to turn things around. Easterbrook says he wants to transform McDonald's into a "modern, progressive burger company."
That has meant a recommitment by McDonald's to making sure its Big Macs and French fries are served hot, and very quickly. Easterbrook has also sought to put more power into the hands of McDonald's franchisees, encouraging them to be ambitious on the menu to better meet their client's flavor preferences.
A revitalized McDonald's could pose a threat to hard-charging Sonic, which plans to open 34-44 new locations in the U.S. this year and hopes to drive earnings growth of 25% to 27%. But Sonic does have a few plans in the works to stay on top.
"This summer, we are very focused on portable food, drinks and ice cream," said Hudson, who has served as Sonic's CEO for the past 20 years.
That could mean the introduction of new limited-time offerings in the side-item category, where Sonic already stands out in the industry for items such as cheese-covered potato tots and cheese-stuffed fried jalapenos. Or it could be a new type of hot dog, a category where Sonic currently offers eight options.
The hot dog has recently reemerged as a popular accessory in the fast-food business, appearing on the new Carl's Jr. "Most American Thickburger" and Yum! Brand's (YUM) Pizza Hut's "Hot Dog Bites" pizza. According to Hudson, every 1 out of 7 hot dogs served outside of the home is sold from Sonic. "It's not surprising that people are trying to take hot dogs onto their menus", noted Hudson.
For now, Sonic won't have to contend with the red-hot Shake Shack (SHAK), since the "better burger" chain only operates over 40 locations in the U.S. mostly in dense urban markets. By comparison, Sonic is a suburban staple with more than 3,500 locations in 44 states.
When asked about Shake Shack's long-term potential, Hudson said, "the challenges with a younger concept, it's very hot in the marketplace, the question is getting outside of New York. What kind of legs does it have?"