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| SONC > SEC Filings for SONC > Form 10-Q on 9-Apr-2009 | All Recent SEC Filings |
9-Apr-2009
Quarterly Report
Overview
Performance in the second quarter ended February 28, 2009 included a decrease in system-wide same-store sales of 3.6% and a decrease in Partner Drive-In same-store sales of 6.0%. Restaurant level and operating margins declined as a result of the de-leveraging impact of lower sales volumes coupled with rising commodity costs.
For the second quarter of fiscal 2009, revenues decreased 3.2%, while operating income decreased 31.4%. Net income decreased 6.5% during the quarter and earnings per share decreased 6.7% to $0.14 per diluted share from $0.15 in the year-earlier period. For the first half of fiscal 2009, revenues decreased 3.2%, while operating income decreased 30.4%. Net income decreased 30.9% during the period and earnings per share decreased 27.8% to $0.26 from $0.36 in the year-earlier period. Net income for both the second quarter and the first half of fiscal 2009 includes a gain on early extinguishment of debt totaling $6.4 million.
The following table provides information regarding the number of Partner Drive-Ins and Franchise Drive-Ins in operation as of the end of the periods indicated as well as the system-wide growth in sales and average unit volume. System-wide information includes both Partner and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company's revenues because franchisees pay royalties based on a percentage of sales.
System-Wide Performance
($ in thousands)
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
Percentage increase in sales 1.5 % 7.7 % 1.6 % 7.3 %
System-wide drive-ins in operation (1):
Total at beginning of period 3,505 3,368 3,475 3,343
Opened 27 34 66 70
Closed (net of re-openings) (21 ) (8 ) (30 ) (19 )
Total at end of period 3,511 3,394 3,511 3,394
Average sales per drive-in: $ 242 $ 248 $ 503 $ 516
Change in same-store sales (2): (3.6 %) 3.2 % (3.6 %) 2.6 %
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(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
System-wide same-store sales decreased 3.6% during the second quarter and first half of fiscal year 2009 as a result of a decrease in average check and, to a lesser extent, a decrease in traffic (number of transactions per drive-in). Approximately one percentage point of the decline in sales and traffic is attributable to one less day of operations in February 2009 versus February 2008. The Company has implemented a number of initiatives to improve system-wide same-store sales. These include implementing a more robust customer satisfaction tool and a new pricing strategy at the drive-in level. In addition, the Company recently implemented a new Everyday Value Menu. Traffic improved notably in the second quarter with the implementation of the value menu.
The following table provides information regarding drive-in development across the system. Retrofits represent investments to upgrade the exterior look of our drive-ins, typically including an upgraded building exterior, new more energy-efficient lighting, a significantly enhanced patio area, and improved menu housings.
System-Wide Drive-In Development
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
New drive-ins:
Partner 3 5 8 10
Franchise 24 29 58 60
System-wide 27 34 66 70
Rebuilds/relocations:
Partner - 2 2 2
Franchise 12 14 31 29
System-wide 12 16 33 31
Retrofits, including rebuilds/relocations:
Partner 11 39 24 77
Franchise 112 200 240 402
System-wide 123 239 264 479
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Results of Operations
Revenues. The following table sets forth the components of revenue for the
reported periods and the relative change between the comparable periods.
Revenues
(In thousands)
Three Months Ended Percent
February 28, February 29, Increase/ Increase/
2009 2008 (Decrease) (Decrease)
Revenues:
Partner Drive-In sales $ 141,708 $ 147,139 $ ( 5,431 ) (3.7 %)
Franchise revenues:
Franchise royalties 26,376 25,684 692 2.7 %
Franchise fees 851 1,019 (168 ) (16.5 %)
Other 62 779 (717 ) (92.0 %)
Total revenues $ 168,997 $ 174,621 $ (5,624 ) (3.2 %)
Six Months Ended Percent
February 28, February 29, Increase/ Increase/
2009 2008 (Decrease) (Decrease)
Revenues:
Partner Drive-In sales $ 294,755 $ 306,424 $ (11,669 ) (3.8 %)
Franchise revenues:
Franchise royalties 55,431 54,323 1,108 2.0 %
Franchise fees 2,022 2,259 (237 ) (10.5 %)
Other 855 1,796 (941 ) (52.4 %)
Total revenues $ 353,063 $ 364,802 $ (11,739 ) (3.2 %)
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The following table reflects the growth in Partner Drive-In sales and changes in comparable drive-in sales for Partner Drive-Ins. It also presents information about average unit volumes and the number of Partner Drive-Ins, which is useful in analyzing the growth of Partner Drive-In sales.
Partner Drive-In Sales
($ in thousands)
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
Partner Drive-In sales $ 141,708 $ 147,139 $ 294,755 $ 306,424
Percentage change (3.7 %) 7.4 % (3.8 %) 8.1 %
Drive-ins in operation (1):
Total at beginning of period 680 662 684 654
Opened 3 5 8 10
Acquired from (sold to) franchisees (9 ) (1 ) (17 ) 4
Closed (5 ) (1 ) (6 ) (3 )
Total at end of period 669 665 669 665
Average sales per drive-in $ 212 $ 223 $ 440 $ 467
Percentage change (4.9 %) 3.1 % (5.8 %) 3.5 %
Change in same-store sales (2) (6.0 %) 2.3 % (6.3 %) 2.8 %
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(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
Partner Drive-In sales decreased 3.7% for the second quarter and declined 3.8% for the first half of fiscal year 2009. These decreases were largely driven by the decline in same-store sales for existing drive-ins in both periods and the refranchising of 17 Partner Drive-Ins, which was partially offset by sales from newly constructed and acquired drive-ins. Current and future initiatives to improve same-store sales are designed to provide a unique and high quality customer service experience. The Company has restructured the organization, simplified incentive compensation plans for store-level management, implemented a more robust customer service satisfaction tool, and implemented a more effective pricing strategy at the drive-in level.
The following table reflects the growth in franchise income (franchise royalties and franchise fees) as well as franchise sales, average unit volumes and the number of Franchise Drive-Ins. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.
Franchise Information
($ in thousands)
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
Franchise fees and royalties (1) $ 27,227 $ 26,703 $ 57,453 $ 56,582
Percentage increase 2.0 % 15.1 % 1.5 % 14.6 %
Franchise Drive-Ins in operation (2):
Total at beginning of period 2,825 2,706 2,791 2,689
Opened 24 29 58 60
Acquired from (sold to) company 9 1 17 (4 )
Closed (16 ) (7 ) (24 ) (16 )
Total at end of period 2,842 2,729 2,842 2,729
Franchise Drive-In sales $ 705,151 $ 687,268 $ 1,463,553 $ 1,423,543
Percentage increase 2.6 % 7.7 % 2.8 % 7.1 %
Effective royalty rate 3.74 % 3.74 % 3.79 % 3.82 %
Average sales per Franchise Drive-In $ 250 $ 255 $ 520 $ 529
Change in same-store sales (3) (3.0 %) 3.4 % (3.0 %) 2.6 %
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(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2008.
(2) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(3) Represents percentage change for drive-ins open for a minimum of 15 months.
Franchise royalties experienced a 2.7% increase in the second quarter related primarily to royalties from new Franchise Drive-Ins. This increase was offset by the impact of the decline in same-store sales at Franchise Drive-Ins. For the first half of fiscal year 2009, franchise royalties increased 2.0% related primarily to royalties from new Franchise Drive-Ins, offset by the decline in same-store sales at Franchise Drive-Ins and the impact of the decreasing effective royalty rate.
Franchise fees decreased by $0.2 million in the second fiscal quarter and $0.2 million for the first half of fiscal 2009 compared to the same periods in the prior year. The decline resulted from fewer Franchise Drive-In openings, in addition to a decline in fees associated with the termination of area development agreements compared to the prior-year period.
Operating Expenses. The following table presents the overall costs of drive-in operations, as a percentage of Partner Drive-In sales. Minority interest in earnings of Partner Drive-Ins is included as a part of cost of sales, in the table below, since it is directly related to Partner Drive-In operations.
Restaurant-Level Margins
Percentage
Three months ended points
February 28, February 29, Increase/
2009 2008 (Decrease)
Costs and expenses:
Partner Drive-Ins:
Food and packaging 27.7 % 26.5 % 1.2
Payroll and other employee benefits 33.4 31.1 2.3
Minority interest in earnings of Partner Drive-Ins 2.2 3.3 (1.1 )
Other operating expenses 22.6 20.3 2.3
85.9 % 81.2 % 4.7
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Restaurant-Level Margins (continued)
Percentage
Six months ended points
February 28, February 29, Increase/
2009 2008 (Decrease)
Costs and expenses:
Partner Drive-Ins:
Food and packaging 27.7 % 26.2 % 1.5
Payroll and other employee benefits 33.0 31.0 2.0
Minority interest in earnings of Partner Drive-Ins 2.3 3.3 (1.0 )
Other operating expenses 22.6 20.7 1.9
85.6 % 81.2 % 4.4
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Restaurant-level margins declined overall for both the three- and six-month periods compared to the same period of the prior year. The declines resulted from higher commodity prices, higher labor costs driven by minimum wage increases and the de-leveraging impact of lower sales. The impact from these margin pressures were offset by a decline in minority partners' share of earnings.
Selling, General and Administrative ("SG&A"). SG&A expenses increased 4.9% to $16.3 million during the second fiscal quarter of 2009 compared to the same period of fiscal year 2008, and increased 6.6% to $32.5 million for the first six months of 2009 versus the same period of 2008. This rate of increase is below our historical trend and relates to our recent refranchising efforts. As we complete the refranchising of additional Partner Drive-Ins, we expect that the rate of increase in SG&A will continue to be below historical levels.
Depreciation and Amortization. Depreciation and amortization expense decreased 1.3% to $12.5 million in the second quarter of fiscal year 2009, and increased 2.6% to $25.5 million for the first six months of 2009. Capital expenditures during the first six months of fiscal year 2009 were $25.2 million. Looking forward, capital expenditures are expected to total approximately $55 to $60 million for the year.
Interest and Other Expense, Net. Interest and other expense, net decreased $7.8 million to $4.4 million for the second quarter and decreased $8.1 million to $16.1 million for the first six months of fiscal year 2009 as compared to the same periods in fiscal year 2008. The primary cause for these decreases is the $6.4 million gain from early extinguishment of debt that resulted from purchasing $25.0 million of the Company's fixed rate notes at a discount in February 2009. Excluding the gain, the decrease in net interest expense was $1.4 million for the second quarter, and $1.8 million for the first six months of fiscal 2009. These decreases primarily relate to the reduction in debt due to scheduled amortization payments on our fixed rate notes, and a declining rate on our variable rate notes. We expect the purchase of debt to result in an annualized decrease in interest expense of approximately $1.3 million going forward.
Income Taxes. Our income tax rate during the second quarter was approximately 38.2%, as compared to 36.5% for the same period of 2008. The provision for income taxes reflects an effective tax rate of 39.7% for the first half of fiscal year 2009 as compared to 37.4% in the same period of 2008. The higher rate for fiscal year 2009 is attributable to non-recurring tax benefits that were recognized in fiscal year 2008. Our tax rate may continue to vary significantly from quarter to quarter depending on the timing of option exercises and dispositions by option-holders and as circumstances on individual tax matters change.
Financial Position
During the first six months of fiscal year 2009, current assets increased 32.3% to $131.5 million compared to $99.4 million as of the prior fiscal year end. Cash balances increased $13.6 million primarily as a result of advances under the Company's variable funding notes and property held for sale increased $13.6 million as a result of refranchising plans as of February 28, 2009. Net property and equipment decreased approximately $28.4 million, primarily as a result of depreciation of $25.5 million, the disposition of $13.4 million in assets related to the refranchising of 17 Partner Drive-Ins, reclassification of $7.1 million to property held for sale, offset by capital expenditures of $25.2 million for the six months. The $7.6 million decrease in noncurrent restricted cash relates to meeting minimum requirements under the Company's debt agreements that allow for funds to move to unrestricted cash. We expect that we will need to transfer these funds back into the restricted cash account during the third quarter. The increase in current assets was offset by the declines in non-current assets to produce a 1.8% decrease in total assets to $821.0 million as of the end of the second quarter of fiscal year 2009.
Total current liabilities decreased $7.7 million or 6.8% during the first six months of fiscal year 2009 primarily as a result of the general decline in accrued liabilities associated with lower sales. The noncurrent portion of long-term debt decreased $43.3 million or 6.0% reflecting scheduled principal payments and the purchase of a portion of the fixed rate notes, offset by net advances of $12.3 on the variable rate notes. Overall, total liabilities decreased $48.2 million or 5.3% as a result of the items discussed above.
Stockholders' deficit decreased $20.9 million or 32.5% during the first six months of fiscal year 2009 due to income from operations and $4.7 million in additional capital from exercises of stock options.
Liquidity and Sources of Capital
Operating Cash Flows. Net cash provided by operating activities decreased $10.2 million or 22.1% to $35.9 million in the first six months of 2009 as compared to $46.0 million in the same period of fiscal year 2008. This decrease resulted primarily from lower operating income for the first six months of fiscal 2009.
Investing Cash Flows. Net cash used in investing activities decreased by $54.5 million to $5.7 million in the first six months of 2009 as compared to $60.2 million in the same period of fiscal year 2008. Purchases of property and equipment of $22.2 million were mostly offset by proceeds of $17.3 million from the sale of the operations and a portion of the real estate for 17 Partner Drive-Ins. We opened six newly constructed Partner Drive-Ins, purchasing the real estate for all of these new drive-ins. The following table sets forth the components of our investments in capital additions for the first six months of fiscal year 2009 (in millions):
New Partner Drive-Ins, including drive-ins under construction $ 14.0 Retrofits, drive-thru additions and LED signs in existing drive-ins 4.4 Rebuilds, relocations and remodels of existing drive-ins 1.5 Replacement equipment for existing drive-ins and other 2.3 Total investing cash flows for capital additions $ 22.2 |
Financing Cash Flows. Net cash used in financing activities increased by $24.5 million to $16.5 million in the first six months of 2009 as compared to $7.9 million provided in the same period of fiscal year 2008. The increase resulted from having sufficient cash on hand to fund operating and investing activities. In addition, no purchases of treasury stock were made during the first six months of fiscal year 2009 compared to $46.6 million purchased in the same period of the prior year.
The Company has a securitized financing facility of variable funding notes that provides for the issuance of up to $187.7 million in borrowings and certain other credit instruments, including letters of credit. As of February 28, 2009, our outstanding balance under the variable funding notes totaled $187.3 million at an effective borrowing rate of 1.83%, as well as $0.4 million in outstanding letters of credit. During the second quarter, upon request of the Company to draw down the remaining $12.3 million in variable funding notes from one of the lenders, the lender, which had previously filed for Chapter 11 bankruptcy, notified the Company that it could not meet its obligation. The Company no longer considers the $12.3 million to be available as reflected in the $187.7 million availability above. See Note 9 of the Notes to Consolidated Financial Statements in the Company's Form 10-K for the fiscal year ended August 31, 2008 for additional information regarding our long-term debt.
In conjunction with the Company's refranchising initiative, subsequent to February 28, 2009, the Company entered into agreements for the sale of the operations of 90 additional Partner Drive-Ins. These transactions are expected to close during the third fiscal quarter.
We plan capital expenditures of approximately $55 to $60 million in fiscal year 2009. These capital expenditures primarily relate to the development of additional Partner Drive-Ins, retrofit of existing Partner Drive-Ins and other drive-in level expenditures. We expect to fund these capital expenditures through cash flow from operations as well as cash on hand.
As of February 28, 2009, our total current cash balance of $77.7 million ($57.9 million of unrestricted and $19.8 million of restricted cash balances) reflected the impact of the cash generated from operating activities, borrowing activities, and capital expenditures mentioned above. We believe that existing cash and funds generated from operations will meet our needs for the foreseeable future.
Critical Accounting Policies and Estimates
Critical accounting policies are those the Company believes are most important to portraying its financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in the Company's Form 10-K for the fiscal year ended August 31, 2008.
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