Sonic Gets Warm Reception As It Expands North

Sonic Corp. (SONC), a staple in fair-climate states, is getting a hot reception as it expands North.

In new markets like Wyoming, Mich., and Kingston, N.Y., Sonic stores in their opening weeks are pulling in three times the sales of stores that open in existing markets. At one of the latest openings in Totawa, N.J., cars lined up for over an hour as police regulated traffic.

Sonic sees big potential in new markets, where stores generate $2 million in sales during their first year, 60% higher than Sonics that open in an existing markets. The company plans to be in 164 markets at the end of this fiscal year, up from 117 in 2004. Some analysts see the store base doubling from its current count of about 3,500 with hundreds of stores in states from Washington to Massachusetts.

"We have yet to find a place where the brand doesn't resonate with consumers," Sonic President Scott McLain said, adding: "There's not a reason why we can't have a similar number of units to what our competition has."

Sonic still is vastly smaller than larger burger chains like McDonald's Corp. (MCD), with nearly 14,000 U.S. stores, and Burger King Holdings Inc. (BKC), with more than 7,000, though Sonic's limited in that its stores are free-standing rather than in areas like food courts. Still, analysts say Sonic's differentiated concept gives it buzz.

While Sonic's novelty will wane, stores in areas like the Northeast should see sales settle above the system average of $1.1 million, due to density and income levels. Later this year, Sonic expects to open its first location in Massachusetts.

"It still has at least a decade of meaningful growth up here," said Oppenheimer & Co. analyst Matthew DiFrisco.

Sonic started in the Southern U.S., with Texas, with almost 1,000 restaurants, its stronghold. It expanded to both coasts, but stayed out of the northernmost states, where roller-skating carhops delivering food to parked cars might not fly in cold weather.

In the last two years, Sonic pushed into states like Michigan, Minnesota, New Jersey and New York. A drive-through operation helped mitigate lost sales during colder months. Sonic also recruited new franchisees, seeking deeper-pocketed operators who could open more stores, McLain said.

National cable ads beginning in 2003 also helped whet consumer appetites for Sonic, which analysts credit for the rabid interest in new markets. "They've essentially primed the pump for new stores," Morgan Keegan & Co. analyst Robert Derrington said.

Sonic's domestic expansion is a long-term story underappreciated by investors, says DiFrisco, although the company has some more immediate issues that have weighed on shares, which recently traded at $9.52, down 21.7% in 2009.

The economic downturn hurt sales as consumers ate out less and drove fewer miles. As competitors like McDonald's gained share, Sonic responded a with a new value menu, yielding a lower bill. Sonic is also tinkering with menu prices to sell more combos.

Choppy credit markets have caused delays in some openings, though the company says real estate costs are down with prime sites becoming available.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; [e-mail]