If obesity statistics conducted by the U.S. Centers for Disease Control and Prevention are anything to go by, Americans love eating, often to the detriment of personal and financial well-being. This core fundamental factor alone should drive the business plan of Sonic (SONC) and the plethora of fast-food eateries that service 50 million Americans every day.
Yet investors recently got spooked by an adjustment to SONC’s business plan, abruptly ending a strong series of bullish trades for Sonic stock.
On June 22, the drive-in burger chain — one of the few successful variants in America — announced that 22 to 27 franchised restaurants will debut in SONC’s current quarter, resulting in a maximum of 47 new openings for the fiscal year.
That number falls a bit short of SONC’s goal of 50 to 60 new franchises, a miss Wall Street didn’t take lightly, kick-dropping Sonic stock 10% lower in the markets following the announcement.
While such a lashing may seem severe for a store-growth rate that fell just short of the lower end of corporate projections, the reason for the miss was attributed to inclement weather — something that SONC should have addressed but apparently did not. Unlike drive-thru eateries, drive-in restaurants are highly dependent on the weather. Summer seasons are ripe with opportunities as top-down drivers enjoy the novelty experience SONC provides. But in the winter? Not so much, as IBIS World analyst Hester Jeon notes that SONC’s revenue dips with the temperature.
In that respect, the responsibility for the decline of Sonic stock’s market value falls on their executive management team. They insisted on opening franchises in places like North Dakota, adding one more state to total the 44 SONC has in its portfolio. SONC execs reasoned that new renovations — including an indoor seating area — should appeal to customers in weather-challenged states.
Unfortunately, the recent numbers suggest otherwise, hence the backlash in the markets. However, the bread and butter for Sonic stock remains mild-climate regions, particularly car-crazed California. Shrewdly, SONC management are focusing most of their attention to Los Angeles and San Diego, with plans to open 300 drive-in locations in the Golden State by 2020.
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Since late 2011, Sonic stock has engaged in a fairly predictable pattern of entering into a choppy consolidation phase prior to hitting new plateaus. Its recent drama in the markets suggests more of the same for SONC shares. Additionally, the technical pattern that has developed between December of last year until now is reminiscent of a bullish pennant formation, which indicates a narrowing of trading range towards a focal point before exploding upward.
On paper, many prominent analysts are either bearish or have muted expectations for Sonic stock. But don’t let a few managerial missteps cloud what otherwise may be a bright opportunity to pick up SONC shares on the cheap!
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
