Sonic 2013 Annual Report Download - page 20

Management's Discussion and Analysis of Financial Condition and Results of Operations
18
Overview
Description of the Business. Sonic operates and franchises the largest chain of drive-in restaurants in the
United States. As of August 31, 2013, the Sonic system was comprised of 3,522 drive-ins, of which 11% were
Company Drive-Ins and 89% were Franchise Drive-Ins. Sonic’s signature food items include specialty drinks (such
as cherry limeades and slushes), ice cream desserts, made-to-order sandwiches and hamburgers, a variety of hot
dogs including six-inch premium beef hot dogs and footlong quarter pound coneys, hand-battered onion rings, tater
tots and wraps. Sonic Drive-Ins also offer breakfast items that include a variety of breakfast burritos and serve the
full menu all day. We derive our revenues primarily from Company Drive-In sales and royalties from franchisees. We
also receive revenues from leasing real estate to franchisees, franchise fees, earnings from minority investments
in franchise operations and other miscellaneous revenues.
Costs of Company Drive-In sales relate directly to Company Drive-In sales. Other expenses, such as
depreciation, amortization and general and administrative expenses, relate to our franchising operations, as well
as Company Drive-In operations. Our revenues and Company Drive-In expenses are directly affected by the number
and sales volumes of Company Drive-Ins. Our revenues and, to a lesser extent, selling, general and administrative
expenses also are affected by the number and sales volumes of Franchise Drive-Ins. Franchise royalties and
franchise fees are directly affected by the number of operating Franchise Drive-Ins and new drive-in openings. Lease
revenues are generated by the leasing of land and buildings for Company Drive-Ins that have been sold to franchisees.
Overview of Business Performance. System-wide same-store sales increased 2.3% during fiscal year 2013 as
compared to an increase of 2.2% for fiscal year 2012. Same-store sales at Company Drive-Ins increased by 2.5%
during fiscal year 2013 as compared to an increase of 2.8% for 2012. We believe the successful implementation
of initiatives, including product quality improvements, a greater emphasis on personalized service and a tiered
pricing strategy, have set a solid foundation for growth which is reflected in our operating results. We continue to
focus on our innovative product pipeline, and our recent shift to a higher proportion of national media expenditures
is supporting our day-part promotional strategy to drive same-store sales. To achieve earnings per share growth,
we utilize a multi-layered growth strategy which incorporates same-store sales growth, operating leverage, new
drive-in development, an ascending royalty rate and deployment of cash. Positive same-store sales is the most
important layer and drives operating leverage and increased operating cash flows.
Revenues decreased slightly to $542.6 million for fiscal year 2013 from $543.7 million for the same period last
year, which was primarily related to a $2.1 million decline in Company Drive-Ins sales resulting from the refranchising
of 34 lower-performing Company Drive-Ins during the second fiscal quarter of 2012, offset by an increase in same-
store sales. Franchising revenues increased $0.9 million during fiscal year 2013 reflecting an increase in royalties
primarily related to positive same-store sales of 2.3% at Franchise Drive-Ins, the refranchising of the 34 drive-ins
mentioned above, partially offset by the decline in lease revenues resulting from the transaction during the second
quarter of fiscal year 2013, in which a franchisee purchased land and buildings leased or subleased from us relating
to previously refranchised drive-ins. Restaurant margins at Company Drive-Ins improved by 60 basis points during
fiscal year 2013, reflecting the leverage of positive same-store sales and, to a lesser extent, the refranchising of
the 34 Company Drive-Ins mentioned above.
Net income and diluted earnings per share for fiscal year 2013 were $36.7 million and $0.64, respectively, as
compared to net income of $36.1 million or $0.60 per diluted share for fiscal year 2012. Excluding various non GAAP
adjustments further described below, net income per diluted share was $0.72 for fiscal year 2013.
The following non-GAAP adjustments are intended to supplement the presentation of the Company’s financial
results in accordance with GAAP. We believe the exclusion of these items in evaluating the change in net income
and diluted earnings per share for the periods below provides useful information to investors and management
regarding the underlying business trends and the performance of our ongoing operations and is helpful for period-
to-period and company-to-company comparisons, which management believes will assist investors in analyzing the
financial results for the Company and predicting future performance.