Comfort Inn 2004 Annual Report Download - page 10

Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand
Choice Hotels International, Inc. and subsidiaries (together “the Company”). MD&A is provided as a supplement
to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes.
Overview
We are a hotel franchisor with franchise agreements representing 4,977 hotels open and 569 hotels under
development as of December 31, 2004, with 403,806 rooms and 45,167 rooms, respectively, in 49 states and
more than 40 countries and territories outside the United States. Our brand names include Comfort Inn, Comfort
Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Cambria Suites and Flag
Hotels. The Company’s franchises operate in 49 states and more than 40 countries and territories outside of the
United States. Approximately 95% of the Company’s revenues are derived from hotels franchised in the United
States.
Our Company generates revenues, income and cash flows primarily from initial and continuing royalty fees
attributable to our franchise agreements. Revenues are also generated from partner services endorsed vendor
arrangements, hotel operations and other sources.
We are contractually required by our franchise agreements to use the marketing and reservation fees we
collect for system-wide marketing and reservation activities. These expenditures, which include advertising costs
and costs to maintain our central reservations system, help to enhance awareness and increase consumer
preference for our brands. Greater awareness and preference promotes long-term growth in business delivery to
our franchisees, which ultimately increases franchise fees earned by the Company.
Our Company articulates its mission as a commitment to provide hotel franchises that strive to generate the
highest return on investment. We have developed an operating system dedicated to our franchisees’ success: One
that focuses on delivering guests to our franchised hotels and reducing costs for our hotel owners. More
specifically, through our actions we strive every day to continuously improve our franchise offerings to create the
highest return on investment of any hotel franchise.
We believe that executing our strategic priorities creates value. Our Company focuses on two key value
drivers:
Profitable Growth. Our success is dependent on improving the performance of our hotels and increasing our
system size by selling additional hotel franchises. We attempt to improve our franchisees’ revenues and overall
profitability by providing a variety of products and services designed to increase business delivery to and/or
reduce operating and development costs for our franchisees. These products and services include national
marketing campaigns, a central reservation system, property and yield management systems, quality assurance
standards and endorsed vendor relationships. We believe that healthy brands which deliver a compelling return
on investment for franchisees will enable us to sell additional hotel franchises. We have established multiple
brands that meet the needs of many types of guests, and can be developed at various price points and applied to
both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market
conditions. Improving the performance of the hotels under franchise and growing the system through additional
franchise sales while maintaining a disciplined cost structure are the keys to profitable growth.
Maximizing Financial Returns and Creating Value for Shareholders. Our capital allocation decisions,
including capital structure and uses of capital, are intended to maximize our return on invested capital and create
value for our shareholders. We believe our strong and predictable cash flows create a strong financial position
that provides us a competitive advantage. Our business does not require significant capital to operate and grow,
therefore, we can maintain a capital structure that generates high financial returns and use our excess cash flow to
increase returns to our shareholders. We have returned value to our shareholders in two primary ways: share
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