Sonic Corporation (SONC) Pressured by Potential Federal Minimum-Wage Increase

March 11, 2013

Sonic Corporation (SONC) would be under pressure if the federal minimum wage were to rise, creating significant labor-cost increases at a majority of its stores for this quick-service restaurant and perhaps stunting its appetite for expansion, says Sharon Zackfia, Partner and Group Head-Consumer at William Blair & Company, L.L.C.

Sonic has done a good job turning around its same-store sales trends over the past year, but I’m a little concerned that a higher minimum wage could not only create margin pressure at Sonic‘s company-owned restaurants — half of which are in the state of Texas, which has the federal minimum wage — but could also perhaps impede appetite for franchisee development,” Zackfia said.

SONC‘s large exposure to Texas creates potential margin pressure. Moreover, Zackfia says the restaurant segment with some of the highest exposure to the minimum-wage is QSR, a segment which may have more problems passing through the increased labor costs to the consumer.

Sonic has been at 3,500 locations, give or take, for three or four years now, and I was hoping to see an inflection in development in the not-too-distant future, and the minimum-wage discussion creates more concern on that front,” Zackfia said.