Sonic 2013 Annual Report Download - page 24

Management's Discussion and Analysis of Financial Condition and Results of Operations
Franchising revenues increased by $2.7 million, or 2.0%, to $134.6 million for fiscal year 2012 as compared
to $131.9 million for fiscal year 2011. The increase in franchise revenues was primarily driven by a $1.9 million
increase in royalties resulting from same-store sales increases combined with incremental royalties from newly
constructed and refranchised drive-ins. These royalty increases and the effective royalty rate were negatively
impacted by various development incentives and certain franchisee restructuring efforts.
Other revenues were flat in fiscal year 2013 and increased $1.5 million to $4.7 million in fiscal year 2012 as
compared to the prior year. The increase in fiscal year 2012 was primarily due to changes in income from minority
investments in franchise operations.
Operating Expenses. The following table presents the overall costs of drive-in operations as a percentage of
Company Drive-In sales. Other operating expenses include direct operating costs such as marketing, telephone and
utilities, repair and maintenance, rent, property tax and other controllable expenses.
Percentage
Company Drive-In Margins Points
Year Ended August 31, Increase
2013 2012 (Decrease)
Costs and expenses:
Company Drive-Ins:
Food and packaging 28.5% 28.1% 0.4
Payroll and other employee benefits 35.4 35.7 (0.3)
Other operating expenses 21.4 22.1 (0.7)
Cost of Company Drive-In sales 85.3% 85.9% (0.6)
Company Drive-In Margins Percentage
Year Ended August 31, Points
2012 2011 (Decrease)
Costs and expenses:
Company Drive-Ins:
Food and packaging 28.1% 28.1%–
Payroll and other employee benefits 35.7 36.4 (0.7)
Other operating expenses 22.1 22.2 (0.1)
Cost of Company Drive-In sales 85.9% 86.7% (0.8)
Drive-in level margins improved by 60 basis points during fiscal year 2013 reflecting leverage from improved
same-store sales and, to a lesser extent, the refranchising of 34 lower-performing Company Drive-Ins during the
second quarter of fiscal year 2012. Food and packaging costs were unfavorable by 40 basis points, which primarily
resulted from a product mix shift due to summer promotion activity. Payroll and other employee benefits, as well
as other operating expenses, improved 100 basis points primarily as a result of leveraging labor with improved sales
and the refranchising of the 34 drive-ins discussed above.
Drive-in level margins improved 80 basis points in fiscal year 2012, as compared to 2011, reflecting leverage
from improved same-store sales and the refranchising of lower-performing drive-ins discussed above. Food and
packaging costs remained flat during fiscal year 2012, which was a combination of moderating commodity cost
inflation during the latter half of the year, effective inventory management, and moderate price increases taken over
the preceding 12 months. Payroll and other employee benefits as well as other operating expenses improved by a
combined 80 basis points primarily as a result of leveraging labor with improved sales.
Selling, General and Administrative (“SG&A”). SG&A expenses increased 1.3% to $66.0 million for fiscal year
2013, and remained relatively flat increasing 0.4% to $65.2 million during fiscal year 2012 as compared to fiscal
2011. The increase in SG&A expense for fiscal year 2013 was largely attributable to an increase in variable
compensation offset by a decline in bad debt expense due to improved sales and profitability at Franchise Drive-Ins.
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