FDD Talk 2014: Our Latest Views on DQ Grill & Chill’s Average Sales, Product Cost, Labor Cost, and Manageable Profit

Highlights of DQ Grill & Chill’s Item 19 Financial Performance Representations (2014 FDD)

• Schedules A, B, and C disclose information about DQ Grill & Chill restaurants that:

• were newly constructed freestanding restaurants developed under American Dairy Queen’s new restaurant development or ARD programs;
• were developed and first opened for business between January 1, 2011 and December 31, 2012;
• were operated for the full year 2013; and
• are franchisee owned and operated.

• This financial performance representation does not include:

• new DQ restaurants developed in Texas (which have the “Texas County Foods” cooked food menu and are offered under a separate disclosure document);
• existing DQ restaurants that have converted to the DQ Grill & Chill restaurant’s facility design, menu, and trademark by remodeling an existing DQ restaurant or replacing an existing DQ restaurant with a new DQ Grill & Chill restaurant design facility either at the same site or at a new location;
• new DQ Grill & Chill restaurants that involved a conversion of a closed other quick service restaurant brand; or
• new DQ Grill & Chill restaurants that were opened in a fuel center.

• Schedule A presents Net Sales information for all locations that qualify for inclusion in this financial performance representation.

• Schedule B includes the following information for locations that submitted a usable profit and loss statement (“P&L”) to ADQ:

• weighted average and straight average Net Sales;
• certain expenses and manageable profit percentages; and
• best, worst, weighted average, and straight average restaurant results by category, and the number and percentage of restaurants in each category that outperformed the weighted average and the straight average results for that category.

• Schedule C presents Net Sales information for locations that did not submit a P&L to ADQ that ADQ could use as a basis for including the location in Schedule B.

• Schedule A. Number of locations that qualify for inclusion in this financial performance representation:  43

• Schedule B. Number of locations that submitted a usable P&L to ADQ:  22

• Schedule C. Number of locations included in Schedule C:  21
• Because ADQ has not received a P&L for the location:  19
• Because the P&L submitted to ADQ showed a variance of +3% from the sales reports: 2

• The data in Schedules A and C is based on sales reports submitted to ADQ by franchisees of the restaurants included in the schedule, and the data in Schedule B is based on information submitted on profit and loss statements from franchisees of the restaurants included in the schedule.

• ADQ has not audited or independently verified the results in the profit and loss statements or sales reports.

• Net Sales. Gross sales less sales tax, sales discounts, and coupons.

• Product Cost. The cost of the food products that are sold to consumers and the associated paper purchases (based on beginning inventory plus purchases less ending inventory). The food products include ingredients, beverages, and condiments. The associated paper purchases include bags, product wraps and containers, other paper products, cups and lids, straws, and eating utensils.

• Note that the food cost portion of discounts given and employee meals is reflected in local advertising. Local advertising is a restaurant controllable expense.

• Labor. The sum of crew labor wages, manager’s salary and other compensation, and related taxes and benefits. Labor does not include payments that may be made to a franchisee or its owners in the form of a manager’s salary or wages. Labor does not include payments that may be made to a franchisee or its owners in the form of an owner’s draw, a dividend, or similar distributions.

• Restaurant Controllables. The sum of utilities, telephone, local advertising (includes product costs for discount sales and employee meals), repairs and maintenance, service contractors, laundry and uniforms, operating supplies (other than inventory), trash and recycling, and bank charges (other than debt service).

• Miscellaneous Expenses. All miscellaneous expenses are rolled up into the total Restaurant Controllables percentage.

• Manageable Profit. Profit remaining after deduction of sales taxes, discounts, Product Cost, Labor Cost, and Restaurant Controllables, but before the deduction of occupancy costs, insurance (non-employment), continuing license fees, sales promotion program fees, legal fees, accounting fees, and other administrative costs.

• Weighted Average. A method of valuation that considers the sales of all restaurants included in Schedule A in relation to the total sales of the group of restaurants that is included. This determines the weighting that is applied to the sales, expense, or manageable profit percentage of each category.

• For example, assume that during the calendar year, the first restaurant had $850,000 in sales, the second restaurant had $1,000,000, and the third restaurant had $1,100,000. The combined total for the 3 restaurants is $2,950,000. The first restaurant makes up 29%, the second restaurant makes up 34%, and the third restaurant makes up 37% of the total sales among the three locations.

• To determine the weighted average, these percentages are applied to each sales, expense, or manageable profit percentage for each restaurant and then added together to come up with a weighted valuation within each category. The weighted average of total sales for the 3 restaurants above is $993,500. (Ambrosio’s note: The weighted average net sales is higher than the straight average net sales because it gives more weight to those restaurants with higher sales. In the same example, the straight average net sales is $983,333.)

Schedule A – For Locations That Qualify for Inclusion in This Financial Performance Representation (43 Units)

Net Sales

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