Sonic 2006 Annual Report Download - page 25

August 31, 2006, we had 152 area development agreements representing approximately 576 planned Franchise Drive-
In openings over the next few years, compared to 163 such agreements at August 31, 2005 which represented
approximately 635 planned Franchise Drive-In openings.While the number of agreements and commitments has
declined, we believe that the termination of several non-performing agreements over the past year has improved the
quality of our franchise pipeline. Another step that has contributed to growth of our confidence in the franchise
pipeline is the recent expansion into a number of new markets, primarily located along the east and west coasts. In
the past, our market expansion has been limited to a fewer number of markets at one time; we believe the brand
awareness provided by our national cable advertising efforts will support this planned expansion to a greater number
of markets.
Twenty-three Franchise Drive-Ins were closed during fiscal year 2006, which was an increase from the 20
Franchise Drive-Ins closed during fiscal year 2005. Most of the closings in fiscal year 2006 were the result of low sales
and were spread across a broad range of markets and franchise groups. Fifteen of the fiscal year 2005 closings related
primarily to two weaker franchise operators in two different markets. We do not believe that these drive-in closings
are indicative of the Sonic brand’s success. We have taken steps to require stronger financial qualifications of new
franchisees, which we believe will significantly mitigate this type of risk. In addition, we expect that some of these
drive-ins may re-open under new franchisee ownership.
We anticipate 150 to 160 store openings by franchisees during fiscal year 2007. Substantially all of these new
drive-ins will open under our current 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 $9 to $10 million in incremental franchise fees and royalties in fiscal year 2007.
Operating Expenses.Overall, drive-in cost of operations, as a percentage of Partner Drive-In sales, decreased to
80.0% in fiscal year 2006 from 80.2% in fiscal year 2005. 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 operations.
Operating Margins
Year Ended August 31,
2006 2005 2004
Costs and Expenses(1):
Partner Drive-Ins:
Food and packaging 25.9% 26.2% 26.3 %
Payroll and other employee benefits 30.0 30.3 30.2
Minority interest in earnings of
Partner Drive-Ins 4.3 4.1 4.4
Other operating expenses 19.8 19.6 18.9
Total Partner Drive-In cost of operations 80.0% 80.2% 79.8%
(1) As a percentage of Partner Drive-In sales.
Food and packaging costs decreased by 0.3 percentage points during fiscal year 2006 compared to fiscal year
2005 following a decrease of 0.1 percentage points during fiscal year 2005 compared to fiscal year 2004.The
improvement for fiscal year 2006 relates primarily to lower dairy costs and a favorable shift in product mix to drinks
and ice cream, which have more favorable margins than other menu items. Looking forward, we anticipate that a
benign commodity cost environment will result in flat to slightly favorable food and packaging costs, as a percentage
of sales, on a year-over-year basis in fiscal year 2007.
Labor costs decreased by 0.3 percentage points during fiscal year 2006 compared to fiscal year 2005 after an
increase of 0.1 percentage points during fiscal year 2005 compared to fiscal year 2004.The improvement for fiscal year
2006 is primarily a result of leverage from higher sales volumes. The slight increase for fiscal year 2005 resulted from
Sonic Corp. 2006 Annual Report
23
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations