Sonic 2010 Annual Report Download - page 22

Management's Discussion and Analysis of Financial Condition and Results of Operations
Franchise Information
Year ended August 31,
($ in thousands) 2010 2009 2008
Franchise fees and royalties
(1)
$ 125,137 $ 131,712 $ 127,111
Percentage change (5.0)% 3.6% 9.9%
Franchise Drive-Ins in operation
(2)
:
Total at beginning of period 3,069 2,791 2,689
Opened 80 130 140
Acquired from (sold to) company, net 16 205 (6)
Closed (48) (57) (32)
Total at end of period 3,117 3,069 2,791
Franchise Drive-In sales $ 3,205,507 $ 3,269,930 $ 3,139,996
Percentage change (2.0)% 4.1% 6.0%
Effective royalty rate 3.82% 3.87% 3.88%
Average sales per Franchise Drive-In $ 1,043 $ 1,122 $ 1,154
Change in same-store sales
(3)
(7.6)% (3.9)% 1.4%
(1)
See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2)
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.
(3)
Represents percentage change for drive-ins open for a minimum of 15 months.
Franchise royalties declined $4.3 million or 3.4% in fiscal year 2010 as compared to fiscal year 2009. Same-store sales
decreases combined with a lower effective royalty rate resulted in a decrease in royalties of $11.5 million, which was partially
offset by $7.2 million in incremental royalties from newly constructed and refranchised drive-ins. The lower effective royalty rate
resulted from the company’s variable royalty rate structure which increases as same-store sales increase and decreases as same-
store sales decrease. Franchise royalties increased 4.1% or $4.8 million in fiscal year 2009 as compared to fiscal year 2008 as a
result of an $8.1 million increase from newly constructed or refranchised stores, which was partially offset by the impact of declining
same-store sales.
Franchise fees declined $2.3 million to $2.8 million in fiscal year 2010 as franchisees opened 80 new drive-ins, down from 130
new drive-ins in fiscal year 2009. The decrease is primarily comprised of $1.8 million attributable to fewer new drive-in openings in
fiscal 2010 compared with fiscal year 2009, as well as $0.7 million in reduced fees associated with incentives for the development
of new Sonic Drive-Ins. Franchisee investment in existing drive-ins continued during fiscal year 2010, and included the relocation or
rebuild of 23 drive-ins (versus 46 in the prior year). Franchise fees decreased 3.1% to $5.0 million during fiscal year 2009 as a result
of fewer Franchise Drive-In openings, in addition to a decline in fees associated with the termination of area development agreements.
Lease revenue increased 72.6% to $6.9 million in fiscal year 2010 from $4.0 million in fiscal year 2009. The increase relates
primarily to lease revenue from refranchised drive-ins in which the company retained ownership of the real estate. Lease revenue
increased $2.5 million to $4.0 million in fiscal year 2009 as compared to $1.5 million in fiscal year 2008 also primarily due to lease
revenue from refranchised drive-ins in which the company retained ownership of the real estate during the latter half of fiscal year 2009.
Other income increased 44.3% to $4.5 million in fiscal year 2010 from $3.1 million in fiscal year 2009 primarily due to a
minority ownership interest that we retained in the operations of 88 drive-ins that were refranchised in fiscal year 2009.
Operating Expenses. The following table presents the overall costs of drive-in operations as a percentage of Company-owned
Drive-In sales. Other operating expenses include direct operating costs such as marketing, telephone and utilities, repair and
maintenance, rent, property tax and other controllable expenses. Noncontrolling interests of Company-owned Drive-Ins are no
longer included as a part of cost of sales in the consolidated income statement due to recent accounting guidance changes. We
have included noncontrolling interests for comparative purposes in the table below.
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