For the most part, America's '50s-style drive-in diners are a long gone part of the past. At Sonic (SONC), they're very much part of the present. And, with 3,500 stores, this Oklahoma City-based burger and shake seller has a story Wall Street continues to support.
It hasn't always. From 2008 through 2011, Sonic's shares fell in three of the four years. But it's been straight up since, with a 55% gain in 2012, a 94% climb last year and another 35% advance in 2014, including an all-time high earlier this month. (I wrote about the stock in March and asked whether investors might be thinking the valuation was high after its two-year surge. Clearly, they weren't -- it traded around $23 then, and it's above $27 now.)
What's helping the company win, CEO Cliff Hudson says, is a diversified menu that isn't overly reliant on burgers. Beef costs have been elevated, and Sonic's menu, he believes, has offered it protection.
"One out of every seven hot dogs in this country, eaten out of the home, is eaten at Sonic," he says. Add to that the fact that about 40% of its sales are drinks and ice cream -- it also has tater tots -- and the stores are positioned fairly well on the commodity side. "This gives us a real natural hedge vs. someone who's just in the hamburger business," he says.
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As for the customer side of it, a key there has been a new appreciation for chicken, a protein U.S. residents have been favoring for years over beef. Chief Marketing Officer Todd Smith said in a separate interview that the company had considerable ground to make up with regard to poultry, and it's trying to do so now.
"At Sonic we had never really focused on chicken prior to the last couple of years," Smith says. "So when you look at where we were two and a half years ago relative to our competitors, we felt like chicken was actually a deficit for us. We weren't doing it as well as could, nor were we really appealing to customers in a way that they were eating."
All-day menu
In markets where Sonic stores aren't heavily represented, it still might garner name recognition because of the long-running series of humorous ads with the "Two Guys." For those who've missed them, the guys sit in a car at Sonic with their shakes and franks and ponder various odd aspects of life.
Hudson notes that while Sonic is in 44 states, it gets about 75% of its system revenue in around a dozen of those. The Southwest is a large part of sales, with ample stores found in Texas and Oklahoma, the latter state being where it began. What's now Sonic started in 1953 as Top Hat Drive-In in Shawnee, Okla.