The biggest chain of drive-in restaurants in the U.S., Sonic Corp. (SONC) recently inked a franchise development deal to set up 14 new drive-ins in the greater Seattle area, Wash., in association with a new franchise partner, Cascade Development Group, LLC. The first of the anticipated openings is expected to hit the market in fall 2014 while the rest will come up by 2018.
Cascade Development Group’s proven track record as a franchisee and its superior knowledge of the local market helped it to clinch the deal. The organization’s leader even served as an owner-operator for 15 Taco Bell franchises of Yum! Brands Inc. (YUM) in the Seattle area. He also had experience in handling franchising operations of DineEquity Inc.’s (DIN) IHOP and Denny’s Corp. (DENN).
We note that there are already five Sonic locations in the Seattle market. We believe, the latest alliance reflects Sonic’s intent to make Washington one of the prime states for expansion considering its potential to generate about $10.9 billion in restaurant sales in 2013, as per the National Restaurant Association.
Apart from this, the Washington Oklahoma-based company is aggressively expanding in states like California and New York to step beyond its core Central U.S market. In fact to tap the markets of Northeast, Sonic has also teamed up with franchisees to test new drive-in prototypes that cater to market specific needs.
This Zacks Rank #3 (Hold) company is gradually moving in a positive direction. The highlights of its third-quarter 2013 earnings, reported in June, were strong comps momentum and margin expansion based on stringent cost control measures. On the developmental front, it seeks to open 25 to 30 new franchise drive-ins in fiscal 2013. The target is slightly higher than fiscal 2012. Sonic anticipates the rate of growth to accelerate in fiscal 2014.
At the end of the third quarter of 2013, this drive-in fast food chain operator had a total of 3,526 drive-in restaurants. While we appreciate Sonic’s effort to move beyond its barriers, investors should note that entry into new markets always involves some risks initially. There will be an attendant headwind of higher pre-opening costs in these areas compared with matured trade areas, in which the company already has support infrastructure. This can limit margin expansion in the initial stages of operation.
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