Sonic (SONC) Q2 2018 Earnings Conference Call Transcript

Sonic (NASDAQ: SONC) Q2 2018 Earnings Conference CallMarch 27, 2018 5:00 p.m. ET

Prepared Remarks:

Operator

Good afternoon. Welcome to the Sonic Corp.'s Second-Quarter Fiscal Year 2018 Earnings Call. As a reminder, today's presentation is being recorded. Before we begin, I would like to remind everyone that the comments made during the conference call are not based on historical facts and are forward-looking statements.

These statements are made in reliance of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of those factors that could cause or contribute to such differences has been described in the news release issued this afternoon on the company's annual report Form 10-K, quarter reports Form 10-Q and other filings with the Securities and Exchange Commission. The company would like to refer you to those sources for information.

Lastly, I'd like to point out that the remarks during this conference call are based on time-sensitive information that is accurate only as of today, March 27, 2018. The archived replay for this conference call will be available through April 3, 2018. This call is property of Sonic Corp. Any distribution, transmission, broadcast, or rebroadcast of this call in any form without the express written consent of the company is prohibited.

The company has posted their fiscal second-quarter earnings slideshow presentation on Investors section of the website for you to review during the conference call and after the conference call for up to 30 days. They have also scheduled this call, which includes a question-and-answer session, to last about an hour. If they have not gotten to your question within that time slot, please contact Corey Horsch at 405-225-4800, and he'll make the appropriate arrangement to answer your questions. I would now like to turn the conference over to Mr.

Cliff Hudson, Sonic Corp.'s chief executive officer. Mr. Hudson, you may now begin.

J. Clifford Hudson -- Chairman and Chief Executive Officer

Thank you and thank all of you for joining us. We appreciate your participation. For the quarter, we reported adjusted earnings per share of $0.17 a share, and this is on a 2.9% decline in same-store sales. We did receive the benefit of $0.04 a share in the quarter from the lower tax rate driven by the Tax Cuts and Jobs Act.

And excluding the impact of this lower tax rate, EPS would have been -- would have declined 13% in the quarter to $0.13 a share. The same-store sales consisted of positive check of almost 3%, and that was offset -- more than offset by negative traffic in the quarter. We estimate that the weather negatively impacted same-store sales, systemwide same-store sales, in the quarter by about 300 basis points. We'll talk more about that later.

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Margins at company-owned drive-ins improved by 40 basis points to 11.4%, and that is with the benefit of the last year's refranchising efforts that more than offset a deleveraging on negative same-store sales and inflationary food and labor costs. In the quarter, we opened eight new drive-ins, and our current area development agreement pipeline has with all -- in total, about 500 new units, 500 new stores. And then finally, we returned to shareholders. We continue to do so through stock repurchases, $31 million in stock repurchases on the quarter for about 1.2 million shares.

Now I want to talk for a minute about the quarter and the sales performance before I, in a few minutes, turn it over to Claudia San Pedro, and she's going to give you an update on several initiatives we have under way. Our same-store sales decline of 2.9% was below what we budgeted. And given some extreme weather felt in the eastern half of the country -- I'm sure many of you felt it firsthand, excluding the weather impact, same-store sales would have been flat. And this is consistent with the kind of weather-neutral trends we saw in the first fiscal quarter.

As a reminder, and I know many of you know this well, our second quarter often exhibits quite a bit of volatility that is not reflective necessarily of our underlying business trends. Our business is more seasonal than many of our competitors, with the second fiscal quarter or winter quarter typically representing only 18% of our system sales for the year. In addition to that, as you know, our product mix, which in the last 20 years having a heavier reliance on ice cream and beverages, it's more sensitive to snow, ice, and cold temperatures and -- particularly the type that we experienced this winter and particularly in January and February. Our more geographically concentrated footprint also had an influence on the results in this recent quarter.

You can see the impact of weather on the same-store sales by region across the country here calculated by Planalytics, who we have used for years and continue to do so when we share this type of data with you. Now, an important consideration when you look at the result is that 87% of our system sales are in the Central and Eastern time zones, which, in the case of this winter, exposed us to really the worst of the weather that has been experienced this year, no -- little to no offset on the West Coast, where the weather was more favorable but makes up a much smaller portion of our system. Now the reason for sharing this from my standpoint, the point of this is not to explain away our second-quarter performance. The purpose of it is to show why, with the negative same-store sales that we experienced in the winter, it's not shaken our conviction on our ongoing efforts to improve traffic and improve sales and profitability for our average store.

In fact, excluding weather and the impact of weather in the month of March, we are operating in the 0 to 2% range that we've given you for the remainder -- guidance that we've given you for the remainder of the fiscal year. So with that, we continue to forecast positive comps in the second half of our fiscal year, and that's when, of course, our operators will recognize over -- not only a significant majority of their sales but 70% of their profits for the year. So with that, I'm going to turn it over to Claudia San Pedro, the president of our company, and I'll come back with some other observations in a moment. Claudia?

Claudia San Pedro -- President

Thank you, Cliff. We are lowering our expectations for new-unit openings this year from 70 to 80 to 55 to 65. Development got off to a slow start this year. And given the pressure on sales over the past 18 months combined with adverse weather conditions, we do not anticipate being able to accelerate development in the back half to make up the difference.

Relocation and rebuild activity continues, and we anticipate 35 to 45 relocations and rebuilds for the fiscal year. From fiscal year '13 through fiscal year '17, our franchisees have invested more than $900 million in new units, technology, point-of-sale, relocations, and rebuilds, demonstrating their commitment and confidence in the brand. We are projecting they will invest more than $200 million in fiscal year '18. We believe our unit-growth projection decline is temporary and reflects a challenging sales environment.

And as sales regain momentum, we expect our development pipeline to accelerate. Net of closures, we anticipate 25 to 35 new units for the year, or approximately 1%, similar to the prior two fiscal years. Closures are likely to be elevated this year as we bring the POPS POS installation initiative to a close and some franchisees elect to close moderately cash-flowing drive-ins rather than make the investment in POPS. These are typically low-volume drive-ins that have minimal impact on our financial performance.

Going forward, we expect to remain at near a 1% net growth rate as we focus on maximizing our own four-wall returns. I'll now turn it -- turn the call over to Corey Horsch, our CFO, to discuss our financial results and guidance in more detail.

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

Thanks, Claudia. For the quarter, adjusted earnings per share improved 13% to $0.17, including a $0.04 benefit from the federal tax bill. Our adjusted tax rate for the quarter was 11.9%. Systemwide same-store sales declined 2.9% during the quarter.

Check improved almost 3%, more than offset by traffic declines given unfavorable weather and the continuation of intense competitive pressure. Franchise revenues decreased by almost $900,000 or 2.4%, driven primarily by lower same-store sales and lower lease revenue. Total company adjusted operating margin improved 140 basis points to 17.2% in the quarter, driven primarily by a higher mix of franchise stores as well as effective expense management. Company drive-in margins improved 40 basis points in the quarter with the positive impact of our refranchising efforts offsetting the deleverage of negative same-store sales, commodity cost inflation of approximately 2.2%, and hourly labor inflation of 2.5 -- 2.6%, sorry, excluding Colorado minimum wage.

Company labor investment initiatives grew same-store hourly wages by another 250 basis points, mostly related to higher assistant manager pay. These wage investments are funded in part by a more efficient labor deployment. We have locked in most of our commodity costs through the end of the fiscal year and anticipate our commodity basket to be up approximately 2% in fiscal '18, with the rate of inflation decreasing gradually in the second half of the fiscal year. For the quarter, we ran approximately 1% pricing at company and franchise drive-ins.

We expect pricing to be between 1% and 2% when we introduce spring menus later this year. Returning cash to shareholders remains a key priority. We're targeting a net debt-to-EBITDA ratio of 3.5 to 4.5 times and expect to finish the year at the high end of the range. To that end, in February, we issued $170 million in fixed-rate senior secured notes in a private securitization transaction.

These notes have an expected life of seven years and will bear interest at 4.03%. The proceeds were used to repay the full amount drawn on the 2016 variable notes, with the excess to be used for investment needs for the business or to return cash to shareholders. We retain $100 million in undrawn capacity on our variable funding notes. The fixed-rate issuance achieved our objectives of locking in favorable interest rates, staggering our debt maturities, and ensuring that we can comfortably meet our operating capital return priorities over the medium and long term.

During the second quarter, we repurchased 1.2 million shares for $31 million as part of our $160 million share-repurchase program. We are expecting to return an additional $24 million to shareholders via dividends in fiscal '18. We ended the quarter with $64.2 million in unrestricted cash. We anticipate CAPEX of approximately $40 million.

There a couple of moving parts within this forecast that you should be aware of. The $40 million includes $7 million to $8 million in the purchase of real estate assets from a franchisee and no build-to-suit activity for the fiscal year. The real estate acquisition came about as a result of a franchisee looking to free up capital for growth in other markets. Purchasing the real estate allowed us to reinvest cash from recent refranchising-related activity and avoid potentially having to prepay a portion of our fixed-rate debt as per the terms of our securitization.

On an underlying basis, that puts our CAPEX below $35 million for the year, consistent with our go-forward expectations. We anticipate free cash flow of approximately $60 million to $63 million in 2018, or close to $70 million excluding cash used for the real estate acquisition. Moving on to our fiscal 2018 outlook. We expect system same-store sales to be flat to up 2% in the back half of the year, equating to full-year same-store sales of down 1% to up 1%.

As Cliff mentioned, first-half performance lagged expectations with a significant headwind from weather. Our second-half guidance, however, is relatively unchanged versus expectations we had set at the beginning of the year. For comparison purposes, if we exclude the impact of the federal tax reform, we now expect adjusted EPS to be up 2% to 7% versus prior expectations of up 5% to 10%, reflecting the first-half shortfall. Including the impact of the tax bill, which we expect will take our fiscal 2018 tax rate to 25% to 26%, we expect fiscal 2018 earnings in the range of $1.43 to $1.50 per share.

For the year, margins at company-owned drive-ins are expected to range from 15% to 15.5% depending on same-store sales performance slightly below prior expectations owing to lower first half-comp performance. We continue to expect upward pressure on labor costs in '18, driven by minimum wage increases, continued investment in drive-in management wages, and overall tightness in the labor market. We anticipate labor to increase by 50 to 100 basis points as a percent of sales on the second half of the fiscal year. We anticipate our lease revenues to be approximately flat versus prior year.

Our projected SG&A expense for '18 remains at $76 million to $78 million. And with that, operator, we would like to open the call to questions, please.

Questions and Answers:

Operator

Thank you. [Operator instructions] We'll take our first question from Nicole Miller with Piper Jaffray. Please go ahead.

Nicole Miller -- Piper Jaffray -- Managing Director

Thank you. Good afternoon. It's all one question but it's long. Same-store sales, a lot of your peers have an 18-month convention.

I think you're 15, dropping in at the 16th month. If you change that, just curious, would that smooth things out here? And then it's helpful to get the Summer Nights update. Can you kind of give us just a slightly more comprehensive understanding of the second-half marketing? So what programs are similar? Are they running the same amount of weeks year over year? How do things align?

J. Clifford Hudson -- Chairman and Chief Executive Officer

So why don't I deal with the marketing piece, and you talk about the smoothing out piece. As it relates to marketing in the latter half of the year to perhaps expand just a little bit what Claudia has touched on, I think from most any angle that you look at the last six months of the year, you can see what gives us the optimism about growing traffic. And in fact, we are seeing, coming out of winter into March, better traffic, better sales. So what is that? Well, first, it is the media and the shift in the nature of the media and frankly heavy reliance on 15-second commercials.

But it's not just the 15-second piece. Much of our industry partners or peers have already done this, may have done it a couple of years ago and more, but it's not just shifting to 15 seconds because we were doing more of that last year. It's the 15-second and the creative that is designed for a 15-second commercial. So the commercials we've been doing in the last, let's just say, 90 days in terms -- not running but in terms of the creative that's prepared for it, we are showing higher Ace scores, some of these Claudia shared in her presentation as to just a specific commercial.

But in the recent past, with 15-second commercials and 15-second creative designed for that 15-second spot and a little bit more intensive focus on making that work harder for us, we are seeing much better scores from an Ace Metrix standpoint than we would have had historically, so better media buying, stronger creative. And in the more recent past here, with a product that we believe can have particular appeal to a female consumer, all consumers generally, a 350-calorie hamburger, but particularly to a female consumer, a creative strategy that has greater appeal there with the two women that were pictured in the slide earlier that Claudia shared, this has been running in the month of March. So you've got better media, better creative that's more focused. You've got channels that we're purchasing in national cable that are more strategically focused, particularly as we're running a promotion intended to appeal to women, buying channels or brands in national cable that also skew somewhat more toward women.

So media, creative, the nature, the efficiency in the 15-second commercial, 10% increase in gross rating points at this time versus a year ago, and then the product piece that Claudia went through, as we move into the spring and summer, there is -- will, on a continuous basis, be product news, new product news that cuts across a variety of day parts and kicks off with this spring, as we've already stated, with the blended beef-and-mushroom burger and attractiveness for a variety of reasons, not the least of which is the lower calories but it's also a delicious burger. So this is the theme that you'll see ongoing through the remainder of the year, the improved media shifting in creative, targeted creative and products. And it is translating into the month of March to stronger traffic and sales. Once we can get beyond this kind of sloppy weather and the late-winter stuff that parts of the country are experiencing, our view is that the fundamentals we're experiencing are more positive than they were six and 12 months ago and thus back to this point about the 0 to 2% positive -- comp, feeling more positive about that.

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

Nicole, I can take your question on comps. Given that our gross unit openings have been between 1% and 2% for the last couple of years, the impact of going from a 15-month convention to an 18-month convention on comps rolling in would be pretty minimal. On top of that, the honeymoon period is typically winding down by the 15 month outside of maybe a couple of new -- outside of new markets, which are not the full 1% or 2% of gross unit openings. So that wouldn't really -- that would be pretty de minimis as far as moving out the volatility.

The volatility really just comes from our product portfolio being a little bit more weather-sensitive than others and our geographic concentration not allowing the weather effects to be smoothed out as easily as it can be for some of our peers.

Operator

And we'll take our next question from Will Slabaugh with Stephens Inc. Please go ahead.

Will Slabaugh -- Stephens Inc. -- Analyst

I want to first ask about just the sort of landscape out there from a value perspective. I know we've seen a lot of your competitors get more aggressive on value. And I know you talked about some of the things, like the Slingers, at an aggressive price point and then also Pretzel Twist that you guys have been pushing. How are you thinking about value on your menu? And is there maybe a more permanent piece of the menu, as you think about revamps, that value may belong versus where it is today?

J. Clifford Hudson -- Chairman and Chief Executive Officer

Well, we do, Will, have an everyday, low-price portion of the menu with a handful of items on it. It's not something that we promote heavily, but it is something available on a daily basis to consumers. So what we have -- work to do -- and this is, I'm sure, not missed on you, we tried to include the value message in our promotions on an ongoing basis. But in the last -- in the recent past versus, let's just say, a year ago, we've worked to have new product news that has a differentiating element about it, and will have broader appeal to consumers but with some price sensitivity.

So you have that Slinger. You have this new burger at $1.99 and then enhanced a little bit at $2.49. So this is our strategy and we have not been anticipating, no pun intended, beefing up the menu with however you described a more concentrated discounting element.

Will Slabaugh -- Stephens Inc. -- Analyst

Got it. That's helpful. If I could follow up with one other, just kind of curious given lots of weather and -- which has led to volatility in the comps as you mentioned. So curious kind of how the conversations with franchisees have gone recently, how you would characterize those.

Obviously, that's probably been a little bit tough on profitability as well for those guys. You mentioned that impacting unit growth a little bit but in general, how you'd characterize those conversations and how we should think about their outlook on the business in the future kind of as you stand today.

Claudia San Pedro -- President

So, Will, this is Claudia. I'll answer that question. I think that we've been very pleased with the constructive discussions we've had with our franchisees, and I'll tell you a couple of things. What we heard from them over a year ago with respect to our business was, look, we've done a great job of driving same-store sales and profits over the past few years, but recently, a combination of the promotional activity, the competitive environment, and our menu have gotten to be -- to the point where it's getting to be more and more difficult to execute on a good customer-service experience from an operational perspective.

So as you look at that and as we look to address each of those things, a couple of points: 1) I think getting great feedback from our franchisees on our efforts to simplify the menu and simplify operations, and that also includes simplifying promotional activity. So one of the ways that we've done that as an example is over the past -- if you look at the second fiscal quarter and the third fiscal quarter, we have very intentionally streamlined our promotional activity to reduce the number of national media messages, to keep them -- and, again, it's under that umbrella of fewer, bigger, better; so streamlining that, thinking that we can still continue to get good traction from a traffic perspective, so received good feedback from that and we think, from a consumer standpoint, seeing good feedback from that perspective as well. From the value perspective, obviously, that's a little bit more challenging for us. It's a constant balance of -- from an ideal perspective, our franchisees, we wouldn't like to discount anything.

At the same time, we recognize the need to be able to reverse negative traffic trends and to drive sales to our drive-ins, which in turn will drive profit. So those are ongoing discussions with our franchisees. And I think the framework we've been looking at it is recognizing that we needed a better everyday-value message, hence the $2.99 and $3.99 price points on burger bundles. We'll continue to assess whether or not we need that.

If the consumer environment evolves and we can introduce more premium products, certainly, we will do that. We think what's nice is that with new premium product innovations like the Pretzel Twist and the Slinger, we're able to have a little bit more flexibility. So we're addressing that piece. So all in all, as we think about where our franchisees are from a profitability standpoint, would we like to see better sales? Yes.

Would we like to be in an environment where we don't discount everything? Yes. But they also recognize that we need to have a good balance of that and we've implemented strategies to address that. I think they are pleased with the initiatives we have in place to simplify the menu and operations, which over the next few months, we think will not only improve sales and profits in the near term but over the long term as well.

Will Slabaugh -- Stephens Inc. -- Analyst

Great. Thank you.

Operator

Thank you. We'll now take our next question from Matt DiFrisco with Guggenheim Securities.

Matthew Kirschner -- Guggenheim Securities -- Vice President

Hi, this is Matt Kirschner on for Matt. Just given the second-half, 0 to 2% same-store sales outlook and 1% pricing with the moderating COGS inflation, why do you imply a decline to the second-half restaurant margin?

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

Second-half restaurant margins are under pressure because predominantly, we have commodity costs of about 2% and we have labor wage inflation of between 2% to 3%, excluding the impact of Colorado minimum wage, which would add another 1 point to 1.5 points to that number. So with those, it depends. At the higher end of the comp range, margins would fare better, obviously. At the lower end, they'd see more pressure.

The difference between the second half and the first half is that we don't have -- we've lapped the benefits of the refranchising efforts that we completed last year.

Matthew Kirschner -- Guggenheim Securities -- Vice President

OK. And are any of the new initiatives a little more labor-intensive or anything like that or it's mostly just wage inflation?

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

It's predominantly wage inflation. We've made a couple -- we continue to make some investments at the manager and assistant-manager level, at the crew to improve customer service and make sure we have -- can provide the best customer-service experience we can throughout all five of our day parts. We have some other initiatives under way to help fund and offset some of those cost pressures, including the roll-out of a labor-scheduling tool that's ongoing throughout the system and will be kind of in effect for a significant percentage of our restaurants as we enter the critical summer selling season. So we'll have an update on progress there.

And, then, a lot of our franchisees continue to implement the inventory-management tool that we put in place in company drive-ins a year ago, which yielded some favorable savings on the food and paper line.

Matthew Kirschner -- Guggenheim Securities -- Vice President

Got it. And just one last question, the 0 to 2%, is that implying an improvement? Or do you think that's where the kind of second-half same-store sales trends are operating now?

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

As Cliff mentioned, excluding kind of some weather noise from early March, we're in the 0 to 2% range month to date that we're expecting for the second fiscal half.

Matthew Kirschner -- Guggenheim Securities -- Vice President

Thanks very much.

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

Sure.

Operator

We'll now take our next question from Andrew Charles from Cowen and Company.

Andrew Charles -- Cowen -- Director

Hey, thanks. Just revisiting the answer you had earlier. Have the conversations with franchisees, has there been discussion around the new prototype to perhaps lower investment costs and could allow the brand access, perhaps to smaller footprints?

Claudia San Pedro -- President

That's a great question. We are actually looking at -- we're constantly looking at ways to improve return on investment. So one of the initiatives that we're looking at is what are strategic ways that we can continue to lower the cost of investment and ensure that we can continue to convey what our brand is about but in perhaps different formats. So we are experimenting with that, and that's just is part of the ongoing development process that's out there.

Andrew Charles -- Cowen -- Director

OK. And then my other question was just the guidance for the back half of the year for flat to up 2% comps. I mean, just the simple arithmetic is kind of in the flat to 4% range just given the 200-basis-points range for the year. So can you kind of just bridge the gap between that to how you're thinking about the back half?

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

I'm not sure I fully understood your question. So if we did flat comps in the second half of the year, that would imply about a negative 1 for the year. If we did 2%, that would imply somewhere between 0.5 point and 1 point positive comps for the year. So that's how the math works.

Does that answer your question?

Andrew Charles -- Cowen -- Director

Yes, we'll talk about it offline. Thank you.

Operator

Thank you. We'll now take our next question from Brian Bittner with Oppenheimer.

Mike Tamas -- Oppenheimer & Company -- Analyst

Great. Thanks. This is Mike Tamas on for Brian. Just curious if you'd be willing to share the weather impact in March.

It's pretty big in the last quarter. Just curious if you'll be able to tell us what that would be currently.

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

As I'm sure you've seen from weather in your neck of the woods, it's negative. It continues to be a drag. We're not even through the month yet. So we don't necessarily have a real-time estimate, but yes, it continues to be a drag as it was in January and February.

Mike Tamas -- Oppenheimer & Company -- Analyst

All right. And do -- you talked about kind of improving trends, though. Is that something that you think the industry is seeing as well? Or do you actually think that you're kind of like now taking some share and you're seeing a better acceleration of maybe like the peer set as a whole?

J. Clifford Hudson -- Chairman and Chief Executive Officer

Well, I think some of the things that we're doing, we'd like to think, are having positive impact. So the -- in terms of us versus the competition, one of the things I mentioned earlier, our media strategy that we've evolved. That, really looking at a lot of our industry peers, they did this one year and two years ago, so the heavy reliance on 15-second commercials and media buying, getting the GRP increase based on that, new to us this year, not new to the industry. So some of these things we're doing, others already gained those efficiencies.

With the promotional activity, I mean, everybody's got their new news of one sort or another. Most of our competition, bigger competition in particular, has focused very heavily on deal, as you know. So this -- the approach that we're taking, I don't -- the media, the creative, the products, the promotion have to have some positive impact. But whether it's on par with others' business in the -- particularly like 30, 60 days, I don't know.

Mike Tamas -- Oppenheimer & Company -- Analyst

Just one quick clarification, Corey. Is 25%, 26% tax rate the right way to think about go forward in the '19 and beyond?

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

It will likely be at the low end of that range or slightly below. We don't get a full 12 months this year given our fiscal year. But there's also kind of some moving parts that we haven't fully assessed, and there's likely to be changes between now and when we're ready to guide fiscal '19. But if you use kind of a 24% to 25% rate, you'd probably be pretty close to where we'll end up for next year.

Mike Tamas -- Oppenheimer & Company -- Analyst

Perfect. Thanks so much.

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

Sure.

Operator

Thank you. We'll now take our next question from Brett Levy. Please go ahead.

Brett Levy -- Deutsche Bank -- Analyst

Thank you, good afternoon. If you could do me a favor and share a little bit more on what you're seeing on the menu simplification, whether it's -- how much of it is across core items, sandwiches, beverages, snacks? Just a clarification, did you say that there's going to be -- after the spring roll-out, there's going to be another purging in the fall? And then just with respect to the roll-out of your -- the market roll-out of [Inaudible] order right now, what do you really need to see specifically to accelerate beyond the April roll-out to the national? And is that a fiscal completion or a calendar completion that you expect to have it nationally?

Claudia San Pedro -- President

I'm happy to address the menu-simplification questions, Brett, and then Cliff can address the Order Ahead system implementation. With the respect to menu simplification, we've really looked at it through two lenses, one from a consumer lens, so how they approach the menu and how they navigate the menu. And from that perspective, our objectives were as follows. It was really looking at it from, as you look at what our brand is known for and what we can deliver on, it's personalization and the right amount of variety that enables and facilitates personalization.

So to that end, what had happened over the past few years is we had added -- and I'll give the example because most of the initial simplification has really occurred in the -- in our ice cream section of the menu. What we had done is added different tiers of items, shakes, master shakes, Blasts, which are candy add-in ice cream products and Master Blasts for more premium product promotions. What we were seeing from a consumer standpoint is they really want the option to know that they can personalize it and they need to know what their options are. We don't have to curate that for them in such an intentional way to the point where we may have 16 different flavors for those two categories.

Instead, what we can do is offer a base of six different flavors that have a series of add-ins where they can then personalize it and come up with their own combination of items. So to that end, the menu simplification was geared from a consumer standpoint of simplifying it from that perspective. So we have, and what you'll see with this latest round of menu change in the spring is eliminating some of those categories, like Master Blasts, but still retaining some of those candy add-ins, so with an eye from a consumer standpoint of doing that. So when you look at the menu, it's about 20% reduction in actual menu items.

It's a cleaner look, particularly again from an ice cream and fountain perspective, what you'll see in the spring. And then from the other objective that we were looking to achieve from a strategic perspective, it was really about operational simplification; so not only if we can achieve what we need to from a consumer perspective but then how can we make sure that we set up our operators so they're in a position where they can execute, on a more consistent basis, a superior customer-service experience. So we looked at it from that perspective as well and we looked at eliminating where there are SKUs that we had on the menu that weren't selling as much. And again, that goes back to our Master Blast.

And I'll just give a simple example. For us to curate a Master Blast of a chocolate, waffle, berry, brownie Blast sundae was a very -- had a specific recipe, very complicated to execute from an operator perspective. For us to offer a base and for the consumer to be able to add in a flavor they wanted is a much easier proposition to execute from an operational perspective. So we looked at it from that perspective.

Going forward, we're looking at again just experimenting and testing both from a consumer and operator perspective, both moderate and aggressive menu reductions. And we'll see what those yield over the next four to six months.

J. Clifford Hudson -- Chairman and Chief Executive Officer

Now the second part of that question about the ICE, the app roll-out. The app is already out there, the integration of -- at the -- in the market and at store level and the Order Ahead piece. So we have that in several isolated stores now, primarily in Oklahoma City. We have also rolled it out to a single market.

It's about 27 stores in that market. And we anticipate the month of April, we'll roll it out to a minimum of two or three more markets. And so we'll get again the sense of scale but also a more diverse marketing base or customer base, I should say, for marketing purposes. It is our intention and we believe they have the capacity to roll it out more broadly, meaning systemwide, by fiscal year-end.

That is, Brett, our objective.

Brett Levy -- Deutsche Bank -- Analyst

And if I could sneak one more question in. I believe you said the pipeline is now about 500 units strong. Can you remind us where that was six and 12 months ago?

Claudia San Pedro -- President

So about six months ago, I can tell you it was probably between 450 and 475, and probably a year ago, probably sitting at about 400, 350 to 400.

J. Clifford Hudson -- Chairman and Chief Executive Officer

While we're waiting on the next question, I'm going to jump back to the question asked earlier and a point that popped back in my head after answering the question. We have seen CREST data recently, which shows in terms of trending, it shows us -- so the question was, is everybody just doing better and we're doing better with them? Or is there something that's a little contra-trend with our activity? The rate at which we're improving versus our peers in the industry, we were moving at a -- on a better trajectory than our peers in the industry we're moving. And that's really only a 30-day sort of measurement, I think. But it's also only have been 30, 60 days since we've done the media creative product promotion element.

So I thought I'd go back and give color on that question.

Operator

Thank you, and we'll take our next question from Dennis Geiger with UBS.

Dennis Geiger -- UBS -- Analyst

Great, thanks. I wanted to ask about that gap and if -- Cliff, if what you had just mentioned, if that's March or if that was the fiscal second quarter and if you have that same gap data for the second quarter that you could provide if it wasn't that data. And then just building on that, anything that you can kind of call out from a competitive standpoint worth noting in the quarter, maybe where -- if competition was a bigger drag or less of a drag than it's been in previous quarters and if high level, there were any particular challenges, day part category. I know you don't want to get into too much detail there, but anything high level that you could share from a competitive standpoint relative to previous quarters.

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

The data that Cliff was sharing was predominantly March, and the reason that's relevant, as he pointed out, was because that's when we initiated a lot of these new elements to our marketing strategy. As it pertains to the second quarter, I don't think we'd want to front run any of our competitors from announcing their results for that period of time. So we won't really comment on that. What's the final part of your question?

Dennis Geiger -- UBS -- Analyst

Just on competition.

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

Oh, right, yes. As far as competitive activity goes, it remains intense. It's hard to say that it was incrementally better or worse for this most recent fiscal period. I think kind of the choppiness of the weather trends in our core market would have made that read to be more difficult than it otherwise would have been.

But I know that some of our larger competitors started new initiatives as of the beginning of the calendar year and it's -- I don't think we can say that it had a disproportionate change in our trend one way or the other.

Dennis Geiger -- UBS -- Analyst

Great. And then just one more if I could. Cliff and Claudia, you gave some good detail on the upcoming sales drivers. But is there anything you could say as it relates to those drivers and same-store sales accelerating, framing whether it's menu innovation on the more premium side, whether it's value, whether it's digital ramping? Kind of what has you most excited? I'm sure it's a combination of things, but if there's something you could kind of tease out there that you're most excited about as we look two and three quarters ahead?

J. Clifford Hudson -- Chairman and Chief Executive Officer

In the immediate future, I'd have to say it's more traditional and conventional marketing activity. So I've already kind of lined out in detail about media, creative, product promotion, though we feel better about the pipeline in all aspects from that standpoint. So looking into this fiscal year, that's a greater -- there'd be greater impact from that than there will from the digital roll-out. And the reason I say that is because the digital roll-out is progressive.

I mean, we have it in less than 1% of system right now. And it will be progressive until we get into the summer months and it will likely almost certainly not have a full quarter's engagement in the fourth quarter. So it will be sometime in the quarter that that roll-out occurs. So -- and the thing I need to say about this is it is a technology or digital infrastructure that is a significant value and one which -- because the customer in our case can pull into a stall, be identified by putting the number from the stall onto their app and then get that quick service, which I have described -- had my own personal experience with that both in Oklahoma City and in the individual market we've rolled out, that this is a key differentiator but it's not a month's promotion.

In other words, we're not only going to get near-term benefit from it, but it will be moderate at the outset and build over time, particularly as we build our own database as to who these customers are and how to market to them and get critical mass over time. So the digital piece is not like a fourth-quarter pop that -- what do we do with it next year. It will be a fourth-quarter benefit that should be years contributing to the growth in traffic to our stores and, therefore, sales and profitability of our operators.

Dennis Geiger -- UBS -- Analyst

Great. Thanks very much.

Operator

Thank you. We'll now take our next question from Gregory Francfort with Bank of America.

Gregory Francfort -- Bank of America -- Vice President

Hey, I just had two questions. One is on breakfast, we've kind of heard from some competitors about that day part being weak, and I'm curious if you've seen that as well and maybe what you would attribute to. And then my other question is for Claudia. I think you talked about an acceleration in unit growth sort of as you move past what's been a little bit of a choppy year this year.

But I think you also made a comment that the sort of medium-term run rate would be 1%, which I think we are running. I guess is there going to be an acceleration in that sort of opening cadence? Or do you kind of expect to run at a similar rate? And how much of the 500 stores there in the pipeline are committed to being opened? And maybe what is the timeline for that? Hence, a lot there.

Claudia San Pedro -- President

OK. I might have to ask you to repeat that last part. So the first part on the day part, our breakfast day part hasn't performed any differently than any of our other day parts. So we haven't seen anything noticeable there with respect to that.

With respect to the pipeline, what I would tell you is, yes, so in the near term, about a 1% growth rate. As we look at regaining sales momentum, we still continue to believe that on a multiyear basis, we can achieve a 2% to 3% net unit growth rate. What gives me confidence in that is as I talk to our franchisees and as we looked at the delays that we've seen, a combination is weather-related. A combination is the challenging sales environment.

But we have franchisees that are thinking that our future -- focus on the future. So as an example, we've got franchisees who may have recently purchased property. And whether it's in the near term because a little bit more of a challenging sales environment, they're going to sit on it for a little bit as opposed to build immediately, or they're looking at areas that are still really green. So they're waiting for some of that commercial development to take place.

They're still planning on building. So that gives me the confidence that over the long term, we're going to see that pick up but in the near term seeing that 1% unit growth rate. And I think you had another question in there. So if you don't mind repeating it.

Gregory Francfort -- Bank of America -- Vice President

Yes. Just on the 500 stores that are committed, how many are committed to being opened and sort of what time frame are those commitments over?

Claudia San Pedro -- President

Those commitments are -- I'd say the bulk of them are over the next three to four years, and probably about 20% of them are beyond that time frame.

Gregory Francfort -- Bank of America -- Vice President

Thank you.

Operator

And we'll now take our final question from Jon Tower with Wells Fargo.

Jon Tower -- Wells Fargo Securities -- Analyst

Great. Thanks. Just quick ones on menu simplification and following up on that. Have you contemplated any impact on same-store sales or baking in any impact from menu simplification? That's one.

Two, then just thinking about the Order Ahead technology, I know it's early days there, but anything you can share on average check per day part usage in the markets that's had it so far? And then lastly, I know it's a topic that I don't think we've discussed before on the calls, but delivery, your competitors have talked about sales being 65% to 70% incremental. And I'm curious to get your thoughts on that sales channel.

Claudia San Pedro -- President

Sure, Jon. I'll answer the menu-simplification question. For this first round of menu simplification, our priority was really looking at items that didn't add a lot from a sales perspective. So we would have a neutral impact from a same-store sale.

So with the changes and the reductions that we've made both in the past fall and this spring, we don't anticipate them having any adverse same-store sales impact at all. The next round of testing that we're currently in the midst of for both the moderate and more aggressive menu tests are looking at what kind of same-store sales declines we would see but the trade-off with two key focus areas: 1) can we direct consumers into other sandwiches or entrée items or snack items? Two, is there a positive trade-off with, while we might see some people leave because of reduced offerings because of the fact that we're offering a better customer service experience and improving day-to-day consistently on the execution front, are we able to gain more frequency from that? So that's what the current tests that are in place will be assessing, those two items. Can we drive consumers to other sandwiches or entrée items? And I use sandwiches as an example for other product categories. And 2) if we can't, are we able still to drive more traffic and frequency with better, more consistent service execution?

J. Clifford Hudson -- Chairman and Chief Executive Officer

And I'll deal with the latter portion of your multipart question there. As it relates to the Order Ahead test and the progression of this, keep in mind it's been in a market now for three weeks, three weeks ago yesterday that, I think, we went live with it. So it would be -- I don't know if we'll ever get to a point we're telling you about average check from different type of order process and day part mix. But even if we got there eventually, it would be premature to do it at this point with three weeks of performance.

So do we get that data? Of course we get it. And we do get it by day part. We do get average check. We get average service times.

We get complaints related to this or the rate of complaints and the nature of complaints. We get all of that. But it's three weeks, and the implementation went very well. The franchise operator is very pleased with it.

And our challenge now is to build adoption of it and repeat usage. As it relates to the delivery piece, we do have several franchisees in several markets that are testing various delivery apps. As you know, there is no single app that operates on a nationwide basis. And so if we're going to do that in varying markets, we have to use various apps.

I will say to you that one of the things about not using an off-the-shelf app because the app that we're -- we have rolled out now is -- we own intellectual property and we've built it in a way to have flexibility and adaptation prospectively. And so as we choose -- and this is not in the immediate future, but as we choose to look at delivery either by evolving our app into that process directly or integrating our app with other apps, the other delivery apps, we have that flexibility now whereas we would not have had it with an off-the-shelf product, which is where we were originally from an app standpoint. But I would say to you that our focus is on this Order Ahead process. The biggest part of our focus on a digital strategy is on the Order Ahead process and the differentiation of the Sonic experience versus our competition because it's our viewpoint that we have the opportunity to really change the definition of convenience in the industry, which has historically relied almost completely on a real estate framework, and the question of physical locations across a market in order to provide the most convenient access for consumers.

But from our viewpoint, the way we're changing that is the customer will be able to decide when and where they want to order. They'll be able to use the app for a complete customization of the order. They'll be able to pay utilizing the app. They'll be able to select which drive-in they choose to go to in order to pick up their food, and they'll be able to choose the time that is most convenient to them.

So everything is in their hand quite literally to drive that entire process rather than having to come to a physical location. And then they'll come to the location that's most convenient for them. And so from our viewpoint -- the convenience piece historically dominated by physical presence and efficient market penetration, then from our viewpoint, we're changing the convenience game. And what we've got to do is get the customer to see that experience.

And then when they have it, we're confident we'll get them to utilize our app and our brand more than they would have otherwise. This is the biggest part of our focus -- doesn't mean we won't be focusing on delivery either by integrating with other apps or otherwise, but it does mean this is key focus for us in immediate future, and we view it as a long-term, sustained play. I think that was the last question. And we appreciate your participation in the conference call today.

As was mentioned by our moderator at the outset, if you have questions regarding any aspect of this, please feel free to reach out to our chief financial officer, Corey Horsch. And beyond that, we'll look forward in a few months of sharing the spring results with you, and I wish you the best of luck. Thanks so much.

Operator

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.

Duration: 0 minutes

Call Participants:

J. Clifford Hudson -- Chairman and Chief Executive Officer

Claudia San Pedro -- President

Corey Horsch -- Vice President, Chief Financial Officer, and Treasurer

Nicole Miller -- Piper Jaffray -- Managing Director

Will Slabaugh -- Stephens Inc. -- Analyst

Matthew Kirschner -- Guggenheim Securities -- Vice President

Andrew Charles -- Cowen -- Director

Mike Tamas -- Oppenheimer & Company -- Analyst

Brett Levy -- Deutsche Bank -- Analyst

Dennis Geiger -- UBS -- Analyst

Gregory Francfort -- Bank of America -- Vice President

Jon Tower -- Wells Fargo Securities -- Analyst

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