Sonic 2003 Annual Report Download - page 22

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Management’s Discussion and Analysis
Comparison of Fiscal Year 2003 to Fiscal Year 2002. Total revenues increased 11.6% to $446.6 million during fiscal year
2003 from $400.2 million during fiscal year 2002. Company-owned restaurant sales increased 12.3% to $371.5 million
during fiscal year 2003 from $330.7 million during fiscal year 2002. Of the $40.8 million net increase, $41.1 million was
due to the net addition of 104 company-owned restaurants since the beginning of fiscal year 2002, ($53.6 million from
the addition of 75 newly constructed restaurants and 77 acquired restaurants since the beginning of fiscal year 2002 less
$12.5 million from 48 stores sold or closed during the same period). The increase in company-owned restaurant sales
from the net addition of restaurants was partially offset by slight sales decreases in the amount of $0.3 million by stores
open the full reporting periods of fiscal years 2003 and 2002.
Franchise royalties increased 8.2% to $66.4 million during fiscal year 2003, compared to $61.4 million during fiscal
year 2002. Of the $5.0 million increase, approximately $3.9 million was attributable to an increase in the number of
franchise restaurants operating in fiscal year 2003 compared to fiscal year 2002. The balance of the increase resulted
from an increase in the effective royalty rate from 3.27% in fiscal year 2002 to 3.34% in fiscal year 2003 as substantially all
of the new stores opened under the newest license agreement, which has a higher average royalty rate. In addition, each
of our license agreements contains an ascending royalty rate feature that allows the royalty rate to increase as sales
volumes increase. Franchise fees increased 16.3% to $4.7 million as 159 franchise drive-ins opened during fiscal year 2003
as compared to 142 during fiscal year 2002.
We expect total revenues to grow during fiscal year 2004 by approximately 13% to 15% based on targeted same-store
sales growth of 1% to 3% as well as the addition of approximately 190 to 200 new drive-ins (25 to 30 company-owned
and 165 to 170 franchised locations). We anticipate that the continued benefit of the ascending royalty rate and new
franchise store openings will result in $6.0 to $7.0 million in incremental franchise income (royalties and fees) in fiscal
year 2004. In addition, substantially all new drive-ins will open under our newest form of license agreement which
contains a higher average royalty rate and initial opening fee.
Restaurant cost of operations, as a percentage of company-owned restaurant sales, was 74.7% during fiscal year
2003 compared to 73.2% during fiscal year 2002. Food and packaging costs, as a percentage of company-owned
restaurant sales remained flat at 26.0% of company-owned restaurant sales as a result of a generally favorable commodity
environment including lower unit level costs for several items including beef and dairy costs. The decrease in unit level
costs was offset by a slight increase in discounting from standard menu prices during the year. Payroll and employee
benefits, as a percentage of company-owned restaurant sales, increased 86 basis points to 29.6% of sales as a result of an
increased investment in store level labor and higher worker’s compensation and health insurance costs. We continued to
invest in management infrastructure at the store level as we rolled out breakfast to the remaining 50% of our stores in
fiscal year 2003. We believe that this investment will not only help breakfast be successful but will also lay an important
foundation for growing our average unit volumes over time. Other operating expenses, as a percentage of company-
owned restaurant sales, increased 52 basis points primarily as a result of the lack of growth in average store volumes, an
increase in the rate of advertising contributions in preparation for the breakfast rollout and rent expense related to the
acquisition of franchise drive-ins where the franchisee retained the real estate. Minority interest in earnings of restaurants
decreased, as a percentage of company-owned restaurant sales, to 3.9% during fiscal year 2003, compared to 4.5% during
fiscal year 2002 as a result of the decline in our restaurant-level margins. Most of the managers and supervisors of
company-owned restaurants own a minority interest in the restaurants, and a substantial portion of their compensation
flows through the minority interest in earnings of restaurants.
Looking forward, we expect restaurant cost of operations, as a percentage of company-owned restaurant sales, to
increase in the range of 50 basis points as a result of the increased investment in store-level operations for the first half of
fiscal year 2004 and upward pressure on food costs notably dairy and beef costs. We continue to look for ways to
strengthen our partnership program which may include greater ownership for store-level partners. However, since we
expect store-level margins to decrease in fiscal year 2004, minority interest in earnings of restaurants is expected to remain
flat or decline as a percentage of company-owned restaurant sales.
Selling, general and administrative expenses decreased, as a percentage of total revenues, to 7.9% during fiscal year
2003, compared with 8.4% during fiscal year 2002 as a result of the leverage of operating at higher sales volumes. We
expect selling, general and administrative expenses to grow in the range of 8% to 10% in fiscal year 2004 while continuing
to decline as a percentage of total revenues. We anticipate that a significant portion of our future revenue growth will be