Sonic Lacks Momentum

Despite the speed-suggesting name and the hyper-hedgehog which shares it's name, Sonic Corp SONC always seem to be playing catch-up within the unforgiving and ultra-competitive world of fast-food. Fast food. It is all in the name. Lag a little and a chain can find itself towards the bottom of the pile very quickly. Despite strong fourth quarter profits, Sonic has work to do and the Toaster Melt Sandwiches that were unveiled yesterday are unlikely to wrench them to the top. The problem seems to be that Sonic's brand just is not strong enough. When McDonald's announced the return of the McRib, as it does from time to time, the news was greeted with a reaction that bordered fanatical. Sonic's Toaster Melt Sandwich barely raised an eyebrow. Really? A jazzy grilled cheese? Not since Whitecastle's chicken ring sliders has the fast food world been so underwhelmed. The Sacramento Bee made a valiant attempt to make the news seem exciting. “The new offerings are available for a limited time in two tasty varieties: the Bacon Cheddar Toaster Melt and the Mushroom Swiss Toaster Melt. The new products provide the best of both worlds—the munch-worthy satisfaction of a burger in the form of a sandwich.” Munch-worthy? Got to love that. "These new Toaster Melt sandwiches pack an unbelievable 1-2 punch of flavor and value," Danielle Vona, chief marketing officer for Sonic, told the Bee. "Sonic customers now have two more delicious ways to stay toasty this winter." Ha! Toasty. Do you see what they did there? However, those fourth quarter results are undeniably impressive. In fact, they more than doubled, pulling in 4Q net income of $12.3 million, or 20 cents per share, compared with $4.7 million, or 8 cents per share, for 4Q10. CEO Clifford Hudson came out to say that, “Company drive-ins completed the fiscal year with a 1.8 percent increase in same-store sales, outperforming the system. This area of our business continues to present one of the best near-term opportunities for disproportionate enhancement of earnings and shareholder value. With this facility in place, we expect to generate approximately $35 million to $40 million of free cash flow during fiscal 2012. We believe the recently announced $30 million share repurchase program is an effective use of our cash and will optimize shareholder value.” On the flip side, Bloomberg reported towards the end of October that the shrinking beef supply signaled record meat prices for SONC. In response, CFO Stephen Vaughan said that SONC will make a small price increase during the fall. How do you cover up a price hike? With a toasty sandwich. Suddenly everything makes sense. ACTION ITEMS:

Bullish:
Traders who believe that Sonic's profits will stay high might want to consider the following trades:

• Well, that sandwich is apparently mighty good. And those 4Q profits were very, very impressive.

Bearish:
Traders who believe that it is only a matter of time before they drop again may consider alternate positions:

• The price hike does not look good. Add to that the stronger brands of rivals and it could be a tough 1Q12 for SONC.
  
  

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