Between 1998 and 2008, you may have noticed that Sonic drive-thrus didn’t change much. The same remote ordering technology. The same burgers. The same items. Prices that might have increased here and there. But nothing meaningful you could point to and say, “This is different than it was ten years ago.”
That was not a coincidence.
In 1998, Sonic was earning $30 million per year in total profits and had $100 million in debt. That was a slightly better than average balance sheet for a fast food operator.
At that point, the management team decided that it would use its retained earnings and begun a massive borrowing program to reduce share count from 95 million in 1998 to 60 million in 2008.
The problem? That $500 million in additional debt, for the sole purpose of repurchasing stock, cost 5% in interest and the share repurchases occurred at an average price … Read the rest of this article!