Sonic 2005 Annual Report Download - page 28

incentive program for drive-in management as well as higher staffing levels reflecting successful ongoing efforts to
reduce turnover at Partner Drive-Ins.
Looking forward, the average wage rate has increased slightly in the last two quarters of fiscal year 2005,
although the increase has not been significant to date. We plan to continue making significant payments under our
sales incentive program, as we believe it has been a major driver of strong sales performance at Partner Drive-Ins.
These increases, however, should be leveraged by higher volumes. As a result, we expect labor costs to be flat to
slightly favorable, as a percentage of sales, on a year-over-year basis, in fiscal year 2006.
Minority interest, which reflects our store-level partners’ pro-rata share of earnings from our partnership program,
increased by $1.6 million during fiscal year 2005, reflecting the increase in average profit per store. During fiscal year
2004, minority interest increased $5.5 million, also reflecting the increase in average profit per store. Overall, we
continue to view the partnership program as an integral part of our culture at Sonic and a large factor in the success
of our business, and we are pleased that profit distributions to our partners increased during fiscal year 2005. Since
we expect our average store level profits to continue to grow in fiscal year 2006, we would expect minority interest to
increase in dollar terms but stay relatively flat as a percentage of sales.
Other operating expenses increased by 0.7 percentage points during fiscal year 2005. Costs increased primarily
as a result of credit card charges associated with the increase in credit card transactions stemming from the success of
the PAYS program, as well as increased repairs and maintenance expenses resulting from a greater focus on the
physical appearance of our drive-ins, both inside and outside. Utility costs also increased toward the end of fiscal year
2005 as a result of increased energy prices. During fiscal year 2004, other operating expenses decreased by 0.1
percentage points as the leverage of operating at higher unit volumes more than offset increased costs. Looking
forward, we expect cost increases in many of the items listed above, particularly utility costs, to carry over into fiscal
year 2006. Our expectations for other operating costs will continue to depend upon future swings in energy costs, but
we generally expect that the cost increases will result in other operating expenses increasing 0.25 to 0.50 percentage
points,in fiscal year 2006.
To summarize, we are expecting overall restaurant-level margins to be relatively flat during fiscal year 2006 on a
year-over-year basis, depending upon the variability in energy costs.
Selling, General and Administrative. Selling, general and administrative expenses increased 6.5% to $40.7 million
during fiscal year 2005 and 8.0% to $38.3 million during fiscal year 2004. We continue to see leverage as the growth in
these expenses was considerably less than the growth in revenues. As a percentage of total revenues, selling, general
and administrative expenses decreased to 6.5% in fiscal year 2005, compared with 7.1% in fiscal year 2004 and 7.9% in
fiscal year 2003. Beginning in the first quarter of fiscal year 2006, the Company will adopt FAS 123R which requires the
fair value of stock options be charged to expense. The projected impact of adopting this standard is estimated to be
additional expense of approximately $8 to $9 million during fiscal year 2006. This expense is expected to be incurred
pro-rata over the fiscal year, with the amount increasing slightly in the third and fourth quarters due to the annual
grant of options that typically occurs at Sonic’s spring board meeting. Excluding the impact of FAS 123R, we anticipate
that these costs will increase in the range of 10% to 12% in fiscal year 2006 and to decline as a percentage of sales.
This rate of increase is higher than prior years primarily because of increased headcount additions which
management believes is necessary to support continued growth in our business.
Depreciation and Amortization. Depreciation and amortization expense increased 10.1% to $35.8 million in fiscal
year 2005 due, in part, to additional depreciation stemming from the Colorado acquisition in July 2004. Similarly,
depreciation and amortization expense increased 11.3% to $32.5 million in fiscal year 2004 as a result of the San
Antonio and Colorado acquisitions, as well as the capital lease on our corporate office space. Capital expenditures,
excluding acquisitions, were $85.9 million in fiscal year 2005. Looking forward, with approximately $75 to $80 million
in capital expenditures planned for the year, normal depreciation and amortization is expected to increase by
approximately 9% to 11% for the year. However, the Company re-evaluated the remaining asset life of certain assets
related to the retrofit of Partner Drive-Ins in the late 1990s and has determined that the remaining useful life should
be reduced. This reduction will cause an incremental increase in depreciation and amortization over the next four
quarters of approximately 7% over the prior year, resulting in an overall expectation that depreciation and
amortization will increase in the range of 16% to 18% for the year.
Provision for Impairment of Long-lived Assets.One Partner Drive-In and one property held for disposal became
impaired during fiscal year 2005 under the guidelines of FAS 144 – ”Accounting for the Impairment or Disposal of
Long-Lived Assets.” As a result, a total provision for impairment of long-lived assets of $0.4 million was recorded for
the carrying costs of these assets in excess of their estimated fair values. One Partner Drive-In became impaired
during fiscal year 2004 which resulted in a provision for impairment of $0.7 million to reduce the drive-in’s carrying
cost to its estimated fair value. During fiscal year 2003, two Partner Drive-Ins became impaired which resulted in a
provision for impairment totaling $0.7 million to reduce the drive-ins’ carrying cost to their estimated fair value. We
continue to perform quarterly analyses of certain underperforming drive-ins. It is reasonably possible that the
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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