Sonic 2014 Annual Report Download - page 16

Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Description of the Business. Sonic operates and franchises the largest chain of drive-in restaurants in the United States.
As of August 31, 2014, the Sonic system was comprised of 3,518 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 3.5% during fiscal year 2014 as compared
to an increase of 2.3% for fiscal year 2013. Same-store sales at Company Drive-Ins increased by 3.5% during fiscal year 2014
as compared to an increase of 2.5% for fiscal year 2013. Our continued positive same-store sales are a result of the successful
implementation of initiatives, including product quality improvements, a greater emphasis on personalized service and a tiered
pricing strategy, that have set a solid foundation for growth. Along with new technology initiatives implemented in Company Drive-
Ins during fiscal 2014, we continue to focus on key initiatives such as increased media effectiveness and our innovative product
pipeline in supporting our layered day-part promotional strategy to drive same-store sales. All of these initiatives drive Sonic’s
multi-layered growth strategy, which incorporates same-store sales growth, operating leverage, deployment of cash, an ascending
royalty rate and new drive-in development. Positive same-store sales is the most important layer and drives operating leverage
and increased operating cash flows.
Revenues increased to $552.3 million for fiscal year 2014 from $542.6 million for the same period last year, which was
primarily due to an increase in Franchise Drive-In royalties and Company Drive-In sales driven by the growth of same-store sales.
Franchising revenues increased $7.2 million during fiscal year 2014, reflecting an increase in royalties primarily related to positive
same-store sales of 3.5% at Franchise Drive-Ins. Restaurant margins at Company Drive-Ins improved by 90 basis points during
fiscal year 2014, reflecting the leverage of positive same-store sales.
Net income and diluted earnings per share for fiscal year 2014 were $47.9 million and $0.85, respectively, as compared to net
income of $36.7 million or $0.64 per diluted share for fiscal year 2013. Excluding the non-GAAP adjustments further described
below, net income per diluted share was $0.84 for fiscal year 2014, compared to $0.72 per diluted share in 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.
Fiscal Year Ended Fiscal Year Ended
August 31, 2014 August 31, 2013
Net Diluted Net Diluted
Income EPS Income EPS
Reported – GAAP $ 47,916 $ 0.85 $ 36,701 $ 0.64
Tax benefit from the IRS’ acceptance of a federal tax method change(1) (484) (0.01) – –
After-tax loss from early extinguishment of debt(2) – – 2,798 0.05
Retroactive tax benefit of WOTC and resolution of tax matters(3) – – (743) (0.02)
After-tax loss on closure of Company Drive-Ins(4) – – 1,510 0.03
After-tax impairment charge for point-of-sale assets(5) – – 1,013 0.02
Adjusted - Non-GAAP $ 47,432 $ 0.84 $ 41,279 $ 0.72
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