Sonic Restaurants example essay topic

Executive Summary Beginning with one restaurant, Sonic has become the largest drive-in chain in the United States. While they are smaller than their competitors, they are still leading in sales growth, customer loyalty and customer satisfaction. Sonic restaurants saturate the southern U.S. This gives them the opportunity to expand to other area. However, Sonic is reluctant due to the colder climates and their basis as a drive-in restaurant.

Sonic should look at adding or combining capabilities to it's restaurants to increase competitiveness and make it easier for them to expand into other areas without limiting themselves. Situational Analysis In 1953, Troy Smith, the founder of SONIC and World War II veteran, was living in Shawnee, Oklahoma. Troy dreamed of owning his own restaurant business. In fact, he had already tried twice.

Troy first owned a small diner called the Cottage Caf'e. The income he received was barely enough to make a living for himself and his family. Troy sold the Cottage Caf'e and bought a bigger restaurant. His next business, the Panful of Chicken, was so successful that he tried opening more. Unfortunately, fried chicken didn't do well in early 1950's Oklahoma and Troy closed his Panful of Chicken restaurant. Troy then owned a steak house that had a root beer stand attached.

This root beer stand, called The Top Hat proved more profitable and eventually outlasted the steak house. While traveling to Louisiana, Troy saw some homemade intercom speakers in use at a local hamburger stand. He contacted the innovator in Louisiana and asked him to make an intercom for the Top Hat. He then hired some local electronics wizards to install the system. He then added a canopy for cars to park under and servers to deliver the food right to customers' cars.

During the first week after the intercom was installed, the Top Hat took in $1750. With his new partner, Charlie Papp e, four more Top Hats were opened. However, their lawyers informed them that the Top Hat name was copyrighted. They changed the name to Sonic to go along with the restaurant slogan of 'Service With the Speed of Sounds. ' 1 In 1973, a group of ten principal franchise owners became the officers of the company. Shares were offered to each store owner.

Because of the amount of stock offered, Sonic became a publicly traded company with 165 stores in the chain. Between 1973 and 1978, Sonic grew tremendously. 800 new stores were opened and a Sonic School that formally trained new managers was established. Sonic's first television advertising campaign was launched also. When Cliff Hudson joined the legal department in 1984, Sonic had a loose collection of around 1000 independent restaurants in 19 states. There was no national advertising program, accounting was done manually, and packaging was inconsistent, and even the menu varied from store to store.

He realized that changes had to be made to turn Sonic's poor financial performance around. After he led a successful buyout in 1986, Hudson was instrumental in the resurrection of Sonic. Hudson headed two different stock offering in 1991 and 1995. These offerings raised enough capital to pay off the company debt and add to working capital. He also had the franchises purchasing together, which resulted in cost savings, consistency and quality. 5 In 1991, Sonic was the 5th largest in the fast-food industry.

Today they call themselves the largest chain of drive-ins in the country. They have to compete with McDonalds, Burger King, Wendy's and Hardee's. Sonic relies heavily on the opening of new restaurants to maintain their expansion. However, Sonic has shown a reluctance to enter new geographic regions. Problem Statement One of the main things that sets Sonic apart from the rest is it's drive-in service. However, this service is not ideal in northern climates.

Sonic would have to depart from it's traditional format to a non-traditional format. Hence, Sonic would not be unique in the competing area. Data collection and analysis section Net income for Sonic increased 21% in 2004 while total revenues rose 20%. The key factor for growth last years was because of expansion. Franchisees opened 167 new drive-ins with partner drive-ins numbering 21. Sonic now has 2,885 restaurants.

Looking at the ratios, there is a signal that Sonic is using financing for expansion. They are currently using $14.1 million of a $125 million line of credit that expires July 2006. Sonic also has long-term debt of $38.1 million and $22.2 million that matures in 2005 and 2006 respectively. They plan to refinance $30 Million of that debt using the line of credit. To confirm the ratios, Sonic plans to use the line of credit to finance new drive-ins, acquisitions, purchase of common stock and other purposes, as needed. 1 Consolidated Statements of Income 2 Year ended August 31, 2004 (In thousands, except per share data) Revenues: Partner Drive-In sale 449,585 Franchise Drive Ins: Franchise royalties 77,518 Franchise fee 4,958 Othe 4,385 536,446 Costs and expenses: Partner Drive Ins: Food and packaging 118,073 Payroll and other employee benefits 135,880 Minority interest in earnings of Partner Drive-In 19,947 Other operating expense 84,959 358,859 Selling, general and administrative 38,270 Depreciation and amortization 32,528 Provision for impairment of long-lived assets and othe 675 430,332 Income from operation 106,114 Interest expens 7,684 Interest income (1,306) Net interest expens 6,378 Income before income taxe 99,736 Provision for income taxe 36,721 Net incom 63,015 Basic income per shar 1.06 Diluted income per shar 1.02 Consolidated Balance Sheets August 31, 2004 (In thousands) Assets Current assets: Cash and cash equivalents 7,993 Accounts and notes receivable, ne 18,087 Net investment in direct financing leases 1,054 Inventories 3,551 Deferred income taxes 798 Prepaid expenses and othe 3,100 Total current assets 34,583 Notes receivable, ne 5,459 Net investment in direct financing lease 6,107 Property, equipment and capital leases, ne 376,315 Goodwill, ne 87,420 Trademarks, trade names and other intangibles, net 6,450 Other assets, ne 2,299 Total assets 518,633 Liabilities and stockholders' equity Current liabilities: Accounts payable 7,695 Deposits from franchisee 2,867 Accrued liabilitie 32,552 Long term debt and obligations under capital leases due within one yea 6,006 Total current liabilities 49,120 Obligations under capital leases due after one year 38,020 Long-term debt due after one year 78,674 Other noncurrent liabilitie 8,231 Deferred income taxes 9,826 Commitments and contingencies (Notes 6, 7, 14, and 15) Stockholders' equity: Preferred stock, par value $.

01; 1,000,000 shares authorized; none outstanding - Common stock, par value $. 01; 100,000,000 shares authorized; shares issued 74,617,554 in 2004 and 73,770,840 in 200746 Paid-in capita 105,012 Retained earning 351,402 457,160 Treasury stock, at cost; 15,098,687 shares in 2004 and 14,945,898 shares in 200 (122,398) Total stockholders' equit 334,762 Total liabilities and stockholders' equit 518,633 Growth Rates 4 Growth Rates (%) Company Industry Sector S&P 500 Sales (MRQ) vs. Qtr. 1 Yr. Ago 19.81 12.99 12.65 17.60 Sales (TTM) vs. TTM 1 Yr. Ago 19.97 14.85 15.08 15.81 Sales - 5 Yr. Growth Rate 15.80 12.71 15.26 9.76 EPS (MRQ) vs. Qtr.

1 Yr. Ago 22.97 15.39 11.78 16.59 EPS (TTM) vs. TTM 1 Yr. Ago 19.69 30.49 21.65 24.79 EPS - 5 Yr. Growth Rate 19.64 14.78 12.39 13.64 Capital Spending - 5 Yr. Growth Rate 4.78 3.66 2.23 3.15 Financial Strength Financial Strength Company Industry Sector S&P 500 Quick Ratio (MRQ) 0.56 0.65 0.89 1.20 Current Ratio (MRQ) 0.68 1.00 1.42 1.69 LT Debt to Equity (MRQ) 0.24 0.47 0.76 0.63 Total Debt to Equity (MRQ) 0.30 0.51 0.87 0.79 Interest Coverage (TTM) 14.68 9.60 7.87 11.87 Profitability Ratios Profitability Ratios (%) Company Industry Sector S&P 500 Gross Margin (TTM) 35.91 28.69 42.86 46.09 Gross Margin - 5 Yr. Avg.

38.67 29.13 42.04 45.61 EBITD Margin (TTM) 25.69 18.28 21.68 21.60 EBITD - 5 Yr. Avg. 26.97 18.34 21.06 20.37 Operating Margin (TTM) 19.78 13.06 12.26 21.20 Operating Margin - 5 Yr. Avg. 20.25 12.80 11.04 18.26 Pre-Tax Margin (TTM) 18.63 11.94 10.88 18.11 Pre-Tax Margin - 5 Yr. Avg.

18.72 11.30 10.46 17.09 Net Profit Margin (TTM) 11.83 8.25 6.81 13.35 Net Profit Margin - 5 Yr. Avg. 11.76 7.41 6.88 11.43 Effective Tax Rate (TTM) 36.50 31.91 30.89 30.26 Effective Tax Rate - 5 Yr. Avg. 37.16 34.55 34.05 33.42 Management Effectiveness Management Effectiveness (%) Company Industry Sector S&P 500 Return On Assets (TTM) 13.06 9.46 5.62 7.40 Return On Assets - 5 Yr. Avg.

12.24 8.57 4.92 6.67 Return On Investment (TTM) 14.30 11.68 7.95 11.16 Return On Investment - 5 Yr. Avg. 13.42 10.66 7.24 10.54 Return On Equity (TTM) 20.91 20.34 12.75 19.46 Return On Equity - 5 Yr. Avg. Design a building that will be able to accommodate automobiles in all climates. This will require some sort of door system that can be retracted during the warmer weather.

This solution would allow Sonic to maintain it's current format year-round and maintain uniqueness. 2. Use the hybrid format they currently have. This includes drive-up windows, inside seating and outdoor drive-in service. 3. Expand into other countries.

Recommendation with Implementation plan. Sonic has a non-traditional franchise plan. However, they do not include the drive-in portion. This was mainly designed for malls, travel plazas, airports, arenas, and military facilities. They have already moved into Idaho, Colorado and Wyoming. This shows a willingness to expand into the colder climates.

Most of these restaurants do not have dine-in facilities. Sonic's description is vague so there is uncertainty that there is a drive-in. They do say that the non-traditional buildings generally do not have drive-in or car hop service. A building could be designed that will have ample indoor seating, a drive-thru window, and a drive-in portion.

Sonic shows that a majority of their business comes during the daylight hours with lunch time being the busiest. A drive-thru window will accommodate the lunchtime crowd that does not want to or can't take the time to go to a drive-in spot to get food. The indoor seating will accommodate the crowd that does not wish to eat out of their automobiles. Marketing will stress the use of the indoor seating and drive-thru during the colder months. They will also stress the drive-in portion during the summer months.

While the car hop's employment will be more of a temporary nature, this will be ideal for the student looking for summer work.

Bibliography

1. Sonic - America's Drive-In (2005).
web Sonic - America's Drive-In (2005).
web 12 annual Report. pdf 3. Yahoo Finance (2005).
web Reuters Know. Now. (2005).
web Hitt, Ireland, Huskisson (2005).