Sonic 2007 Annual Report Download - page 18

Overview
Description of the Business. Sonic operates and franchises the largest chain of drive-ins in
the United States. As of August 31, 2007, the Sonic system was comprised of 3,343 drive-ins,
of which 20% or 654 were Partner Drive-Ins and 80% or 2,689 were Franchise Drive-Ins. Sonic
Drive-Ins feature signature menu items such as specialty soft drinks and frozen desserts, made-
to-order sandwiches and a unique breakfast menu. 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 fundamentals at the drive-in level continued
to be strong during fiscal year 2007. Cumulative results for the year, however, were impacted
by costs associated with the financing of the company’s tender offer and other share
repurchase activities which have collectively resulted in the repurchase of approximately 30%
of the company’s outstanding stock during the year ended August 31, 2007. While the tender
offer was dilutive to earnings per share in the first two quarters of fiscal 2007, it was accretive
to third and fourth quarter earnings per share and is expected to continue to be accretive in
the future. Net income for the year decreased 18.4%, while earnings per share increased 3.4%
to $0.91 per diluted share from $0.88 in the previous year. The company’s earnings were
reduced by debt extinguishment charges related primarily to Sonic’s tender offer and
financing activities during fiscal year 2007, which totaled $0.05 per diluted share for the year.
Excluding these special charges, net income per diluted share was $0.96 for fiscal year 2007,
reflecting a 9.1% increase versus the prior year. The company believes this non-GAAP measure
of net income per diluted share before special items provides for comparability to prior year
net income per diluted share, and is useful in assessing ongoing operations performance.
We continue to experience considerable momentum in our business fueled by solid
growth in same-store sales that led to an increase in system-wide drive-in level average profits.
In turn, the rise in store-level profits, which have grown handsomely over the last four years,
helped produce an increase in the number of new drive-in openings by franchisees. We
believe these results reflect our multi-layered growth strategy that features the following
components:
•Solid same-store sales growth;
• Expansion of the Sonic brand through new unit growth, particularly by franchisees;
• Increased franchising income stemming from franchisee new unit growth, solid same-
store sales growth and our unique ascending royalty rate;
•Operating leverage at both the drive-in level and the corporate level; and
• The use of excess operating cash flow and issuance of new debt for share repurchases and
franchise acquisitions.
The following table provides information regarding the number of Partner Drive-Ins and
Franchise Drive-Ins in operation as of the end of the periods indicated as well as the system-
wide growth in sales and average unit volume. System-wide information includes both Partner
Drive-In and Franchise Drive-In information, which we believe is useful in analyzing the
growth of the brand as well as the company’s revenues since franchisees pay royalties based
on a percentage of sales.
System-wide Performance
Year Ended August 31,
2007 2006 2005
($ in thousands)
Percentage increase in sales 8.6% 10.7% 12.4%
System-wide drive-ins in operation (1):
Total at beginning of period 3,188 3,039 2,885
Opened 175 173 175
Closed (net of re-openings) (20) (24) (21)
Total at end of period 3,343 3,188 3,039
Core markets (2) 2,500 2,435 2,165
Developing markets (2) 843 753 874
All markets 3,343 3,188 3,039
Average sales per drive-in:
Core markets $ 1,145 $ 1,105 $ 1,059
Developing markets 998 954 934
All markets 1,109 1,070 1,023
Change in same-store sales (3):
Core markets 3.6% 5.3% 5.6%
Developing markets 1.2 1.5 7.4
All markets 3.1 4.5 6.0
(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations,
etc.) are not considered closed unless the company determines that they are unlikely to
reopen within a reasonable time.
(2) Markets are identified based on television viewing areas and further classified as core or
developing markets based upon number of drive-ins in a market and the level of
advertising support. Market classifications are updated periodically.
(3) Represents percentage change for drive-ins open for a minimum of 15 months.
Pg. 16
Sonic Corp. 2007 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations