Grocery list
We’ve all noticed rising prices in the grocery store. But imagine the headache such price hikes cause someone who buys such commodities by the ton.
Here’s Sonic Corp. President Scott McClain responding recently to a question from JPMorgan analyst Steven Rees about the company’s contracts to purchase the basic ingredients of the drive-in restaurant’s burgers, shakes, and drinks. And keep in mind that Oklahoma City-based Sonic operates nearly 3,400 stores across the country.
As you know, our largest single item is our syrups that go into our fountain drinks. That’s on a long-term contract. So those continue to be locked in with kind of inflation level increases. Our next largest item is beef which we’re on a month-to-month contract there. That makes up about 12 percent of our food and packaging costs. Dairy costs, which really have two components, cheese and ice cream mix. We have locked in a portion of our cheese through, I think it’s through the month of June. It is up pretty significantly year-over-year. However, there has been some recent movement in the cheese market. We do anticipate it will continue to be up yearover-year until July and then once we lap over the large increase we took last July, we actually should be slightly favorable in cheese. Ice cream mix has actually moved and is now favorable year-over-year. So that’s been somewhat more favorable. As you drop down to chicken, I think it’s about 10 percent and it’s locked in through 2009, flat year-over-year. There are a couple of smaller items that actually are having a bigger impact on us right now. Soybean oil, and then our bread costs are going up. So we still continue to face some pretty significant commodity cost pressures. But I think as you look towards the fourth quarter, we’ll be lapping over where some of those pressures started kicking in next year. But really it will be next year before we probably see some pretty significant relief.
Meanwhile, the company got some good press from a former analyst writing at Investopedia.com, one of the Web’s best business glossary sites. Glenn Curtis, a former securities analyst and financial writer, was wild about Sonic’s same-store sales.
The same store sales increase is all the more impressive because the company reported a 2% increase in the second quarter last year. This wasn’t growth from an artificially low base. Finally, Sonic’s operating margins came in at about 15.3%, which is a roughly 50-basis point increase over the 14.8% it posted last year. This indicates that the improved sales weren’t just the result of Sonic cutting prices on its burgers and slushes.
Curtis offered a target price of $30 for Sonic shares, which closed Thursday at $22.37.
Don Mecoy
Business Writer
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment