Chili's 2007 Annual Report Download - page 56

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COSTS AND EXPENSES
Cost of sales, as a percent of revenues, decreased 0.1% in fiscal 2007 primarily due to an increase in
menu prices at all brands partially offset by increased inventory costs. The cost increase was primarily
driven by unfavorable product mix shifts related to the popularity of new appetizer menu items at Chili’s
and premium margaritas at On The Border. Additionally, we experienced unfavorable pricing for salmon
and produce. The overall cost increase was partially offset by favorable pricing for ribs and steaks. Cost of
sales, as a percent of revenues, decreased 0.3% in fiscal 2006 due primarily to an increase in menu prices at
all brands partially offset by increased inventory costs. The cost increase was primarily driven by an
unfavorable mix shift for beef and pork and unfavorable pricing for poultry. The overall cost increase was
partially offset by favorable pricing for bread and dairy and a favorable product mix shift for poultry.
Restaurant expenses, as a percent of revenues, increased 0.7% in fiscal 2007 primarily due to
minimum wage increases, increases in repair and maintenance and restaurant opening expenses. The
increase was partially offset by a decrease in labor costs due to lower incentive compensation expenses in
fiscal 2007. Restaurant expenses, as a percent of revenues, decreased 0.6% in fiscal 2006. The decrease was
due to a $23.3 million increase in utility and vacation costs recorded in fiscal 2005 resulting from the
correction of accounting policies and a $17.3 million FICA tax assessment recorded in fiscal 2005. The
decrease was also driven by increased sales leverage and productivity, and a reduction in repair and
maintenance expenses in fiscal 2006. The decrease was partially offset by an increase in stock-based
compensation of $9.4 million and an increase in advertising expenditures.
Depreciation and amortization decreased $1.0 million in fiscal 2007. The decrease in depreciation
expense was primarily related to an increase in fully depreciated assets and the classification of assets as
held for sale in January 2007, at which time the assets were no longer depreciated. These decreases were
partially offset by new restaurant construction and ongoing remodel costs. Depreciation and amortization
increased $10.3 million during fiscal 2006. The increase was due to new restaurant construction and
ongoing remodel costs, partially offset by a decrease in depreciation related to the disposition of
restaurants and a declining depreciable asset base for older restaurants.
General and administrative expenses decreased $12.7 million in fiscal 2007. The decrease was
primarily due to lower than expected annual performance based compensation expense, reduced meeting
expenses, and a decrease in headcount, partially offset by increased 401k matching and employee
participation and increased costs for health insurance. General and administrative expenses increased
$54.0 million in fiscal 2006. The increase was due primarily to a $23.6 million increase in performance
based compensation expense, $20.7 million in stock-based compensation expense, and payroll costs
resulting from an increase in headcount.
Other gains and charges in fiscal 2007 includes $19.1 million in gains related to the sale of company-
owned restaurants to franchisees, including 95 Chili’s restaurants to Pepper Dining, Inc. in the fourth
quarter for a $17.1 million gain. Also included is a $3.2 million gain related to the termination of interest
rate swaps on an operating lease commitment. These gains were partially offset by a $12.9 million charge
related to the impairment of long-lived assets at thirteen restaurants as well as lease obligation charges for
seven of the restaurants that closed during fiscal 2007. The decision to close these restaurants was based on
a comprehensive analysis that examined restaurants not meeting minimum return on investment
thresholds and certain other operating performance criteria. Other gains and charges in fiscal 2006
includes gains of $15.9 million related to the sale of company-owned restaurants to franchisees and
$3.3 million related to the sale of real estate. Also included is a $1.1 million gain related to the final
disposition of our interest in Rockfish Seafood Grill (‘‘Rockfish’’). These gains were partially offset by
restructure charges and other impairments of $3.1 million associated with closed restaurants and asset
impairments.
F-6