Sonic 2005 Annual Report Download - page 22

Overview
Description of the Business.Sonic operates and franchises the largest chain of drive-ins in the United States. As of
August 31, 2005, the Sonic system was comprised of 3,039 drive-ins, of which 19% or 574 were Partner Drive-Ins and
81% or 2,465 were Franchise Drive-Ins. Sonic Drive-Ins feature Sonic signature items, such as specialty soft drinks
including Cherry Limeades and slushes, frozen desserts, made-when-you-order sandwiches and hamburgers, Extra-
Long Cheese Coneys, hand-battered Onion Rings, Tater Tots, salads, and wraps. We derive our revenues primarily from
Partner Drive-In sales and royalties from franchisees. We also receive revenues from initial franchise fees. To a lesser
extent, we also receive income from the selling and leasing of signs and real estate, as well as from minority ownership
interests in a few Franchise Drive-Ins.
Costs of Partner Drive-In sales, including minority interest in earnings of drive-ins, relate directly to Partner Drive-
In sales. Other expenses, such as depreciation, amortization, and general and administrative expenses, relate to the
Company’s franchising operations, as well as Partner Drive-In operations. Our revenues and expenses are directly
affected by the number and sales volumes of Partner Drive-Ins. Our revenues and, to a lesser extent, expenses also are
affected by the number and sales volumes of Franchise Drive-Ins. Initial franchise fees and franchise royalties are
directly affected by the number of Franchise Drive-In openings.
Overview of Business Performance. Business performance was strong during fiscal year 2005 as net income
increased 19.6% and earnings per share increased 18.6% to $1.21 per diluted share.
The Sonic brand achieved several milestones during fiscal year 2005, including:
• Surpassing the $1.0 million mark in system-wide average unit volumes;
• Opening of the 3,000th Sonic Drive-In; and
• Our 19th consecutive year of higher system-wide same-store sales.
We continue to experience considerable momentum in our business fueled by strong growth in same-store sales
that, despite some pressure on store-level operating costs during the year, led to a significant increase in system-wide
average profit per store. The rise in store-level profits, in turn, helped produce a solid number of new drive-in
openings by franchisees. We believe these results reflect our multi-layered growth strategy that features the following
components:
• Solid same-store sales growth;
• Increased franchising income stemming from solid same-store sales growth and our unique ascending royalty
rate;
• Expansion of the Sonic brand through new-unit growth, particularly by franchisees;
•Operating leverage at both the drive-in level and the corporate level; and
• The use of excess operating cash flow for franchise acquisitions and share repurchases.
Looking forward, these strategies are expected to continue to positively impact our business. We expect revenue
growth of between 13% and 15% for fiscal year 2006, based upon same-store sales growth in the target range of 2%
to 4%. This increase in revenues includes the expected benefit from 15 Franchise Drive-Ins which were acquired by
the Company effective September 1, 2005.
The following table provides information regarding the number of Partner Drive-Ins and Franchise Drive-Ins in
operation as of the end of the periods indicated as well as the system-wide growth in sales and average unit volume.
System-wide information includes both Partner Drive-In and Franchise Drive-In information, which we believe is useful
in analyzing the growth of the brand as well as the Company’s revenues since franchisees pay royalties based on a
percentage of sales.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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