Sonic 2004 Annual Report Download - page 16

The following table reflects the growth in franchise revenues (franchise royalties and
franchise fees) as well as franchise sales, average unit volumes and the number of
Franchise Drive-Ins. While we do not record Franchise Drive-In sales as revenues, we
believe this information is important in understanding our financial performance since
these sales are the basis on which we calculate and record franchise royalties. This
information is also indicative of the financial performance of our Franchise Drive-Ins.
Franchise Information
Year Ended August 31,
2004 2003 2002
($ in thousands)
Franchise fees and royalties (1) $82,476 $ 71,105 $ 65,412
Percentage increase 16.0 % 8.7 % 11.6 %
Franchise Drive-Ins in operation:
Total at beginning of period 2,209 2,081 1,966
Opened 167 159 142
Acquired from (sold to) company, net (21) (11) (20)
Closed (9) (20) (7)
Total at end of period 2,346 2,209 2,081
Franchise Drive-In sales $2,219,340 $1,988,842 $1,874,562
Percentage increase 11.6 % 6.1 % 10.0 %
Effective royalty rate 3.49 % 3.34 % 3.27 %
Average sales per Franchise Drive-In $ 983 $ 929 $ 935
Change in same-store sales – new method (2) 6.2 % 0.4 % 3.7 %
Change in same-store sales – prior method (3) 5.9 %(0.1)% 3.2 %
(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical
Accounting Policies and Estimates section of MD&A.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
(3) Represents percentage change for drive-ins open for a minimum of one year.
Franchise income, which consists of franchise royalties and franchise fees, increased
16% to $82.5 million in fiscal year 2004.
Franchise royalties increased 16.7% to $77.5 million in fiscal year 2004, compared to
$66.4 million in fiscal year 2003. Of the $11.1 million increase, approximately $6.7 million
resulted from Franchise Drive-Ins’ same-store sales growth of 6.2% in fiscal year 2004,
combined with an increase in the effective royalty rate to 3.49% during fiscal year 2004
compared to 3.34% during fiscal year 2003. Each of our license agreements contains an
ascending royalty rate whereby royalties, as a percentage of sales, increase as sales
increase. The balance of the increase was attributable to growth in the number of
Franchise Drive-Ins over the prior period.
Franchise royalties increased 8.2% to $66.4 million in fiscal year 2003, compared to
$61.4 million during fiscal year 2002. Of the $5.0 million increase, approximately $3.9
million was primarily attributable to an increase in the number of Franchise Drive-Ins
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.
Franchise fees increased 6.1% to $5.0 million as franchisees opened 167 new drive-
ins in fiscal year 2004 as compared to 159 openings in fiscal year 2003. Franchise fees
increased 16.3% to $4.7 million during fiscal 2003 as 159 Franchise Drive-Ins opened
compared to 142 during the previous year.
At August 31, 2004, we had 158 franchise area development agreements compared
to 149 such agreements at August 31, 2003. We anticipate 170 to 180 store openings by
franchisees during fiscal year 2005. Substantially all of these new drive-ins will open
under our newest form of license agreement, which contains a higher average royalty
rate and initial opening fee. As a result of these new Franchise Drive-In openings and the
continued benefit of the ascending royalty rate, we expect approximately $8.0 to $9.0
million in incremental franchise income in fiscal year 2005.
Operating Expenses.Overall, drive-in cost of operations, as a percentage of Partner
Drive-In sales, increased to 79.8% in fiscal year 2004 compared to 78.5% in fiscal year
2003. Minority interest in earnings of drive-ins is included as a part of cost of sales, in the
table below, since it is directly related to Partner Drive-In cost of operations.
Operating Margins
Year Ended August 31,
2004 2003 2002
Cost and Expenses:
Partner Drive-Ins (1):
Food and packaging 26.3% 26.0% 26.0%
Payroll and other employee benefits 30.2 29.6 28.7
Minority interest in earnings of drive-ins 4.4 3.9 4.5
Other operating expenses 18.9 19.0 18.5
Total drive-in cost of operations 79.8 78.5 77.7
(1) As a percentage of Partner Drive-In sales.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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