Dine Brands Global, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Dine Brands franchises Applebee’s, IHOP and Fuzzy’s Taco Shop, and also has rental and financing operations. This unaudited filing covers the third fiscal quarter, which ended October 1, 2023 (reported as September 30), and the nine months then ended. Fuzzy’s was acquired in December 2022.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $202.6 million, down 13.1% | $624.8 million, down 10.9% |
| Gross profit | $97.3 million, up 3.1% | $298.3 million, up 5.5% |
| Income before tax | $24.9 million, versus $28.7 million | $85.6 million, versus $95.4 million |
| Net income | $18.5 million, versus $20.9 million | $64.1 million, versus $69.8 million |
| Diluted EPS | $1.19, versus $1.32 | $4.09, versus $4.22 |
Franchise gross margin was 51.8% in Q3 versus 51.3%; for nine months it was 51.2% versus 51.3%. Interest expense, net rose to $19.1 million in Q3 and $51.5 million for nine months, from $15.3 million and $46.2 million, respectively.
Cash flow and liquidity: For nine months, operating cash flow was $79.3 million (up from $63.5 million); investing cash use was $26.6 million and financing cash use was $218.0 million. Adjusted free cash flow, a non-GAAP measure, was $54.0 million versus $52.4 million. At quarter-end, cash and cash equivalents were $98.2 million and restricted cash was $61.4 million; cash, including restricted cash, less $100 million of revolving borrowings was $59.6 million. The company reported $221.6 million of remaining facility availability and said available cash, operating cash flow and borrowing capacity should cover liquidity needs for at least 12 months.
Debt: Long-term debt, net of issuance costs, was $1.184 billion, including $100 million classified as current. The April 2023 refinancing issued $500 million of notes at 7.824%, replacing the repaid 2019 notes; the higher-cost refinancing contributed to increased interest expense. Reported leverage was approximately 4.6x and debt-service coverage was approximately 3.7x. The revolving facility had $100 million outstanding at a 7.94% rate at quarter-end.
Changes, outlook and risks
- Total revenue fell largely because 69 Applebee’s company-operated restaurants were refranchised in October 2022. Franchise revenue increased, supported by IHOP and Fuzzy’s; Q3 franchise revenue rose to $172.5 million from $164.9 million.
- Q3 domestic same-restaurant sales were down 2.4% at Applebee’s and up 2.0% at IHOP. Management attributed the Applebee’s decline mainly to lower traffic; IHOP’s increase reflected higher average checks despite lower traffic. Both brands underperformed their respective industry segments, according to the company’s cited industry data.
- General and administrative expense rose 4.9% in Q3 and 11.8% for nine months, with higher personnel and professional-service costs among the factors. Nine-month results also included costs related to stopping the IHOP Flip’d initiative.
- Impairment and closure charges were $1.8 million in Q3 and $3.1 million for nine months. Nine-month impairments included IHOP Flip’d technology and four IHOP master land and building leases. Applebee’s franchisees permanently closed 34 restaurants and opened eight during the first nine months of 2023; IHOP added 13 net franchise and area-license restaurants.
- The company declared a $0.51-per-share Q3 dividend and repurchased 318,356 shares for $20.0 million during the first nine months. No numerical earnings or sales guidance is provided in the filing text.
- Risks highlighted include debt levels and refinancing, compliance with securitized-debt covenants, franchisee financial health and operating-cost inflation, restaurant closures, cybersecurity and technology dependence, and litigation. Applebee’s lease guarantees or potential continuing liabilities totaled $405.5 million at quarter-end, or $91.9 million excluding unexercised renewal options. Management stated that pending legal matters were not expected to have a material adverse impact, while cautioning outcomes cannot be assured.
Important facts for investors to verify
- Whether traffic and same-store sales trends at Applebee’s and IHOP improve, and how franchisee closures affect royalty revenue and restaurant development.
- The effect of the 7.824% refinancing and variable-rate facility borrowings on future interest expense, cash flow and refinancing needs.
- Whether liquidity and debt-service metrics remain adequate relative to securitized-debt thresholds and anticipated repayment dates.
- Whether the $405.5 million maximum lease-guarantee exposure, franchisee credit risks and ongoing closures result in material cash obligations or impairments.
- How capital spending, dividends and share repurchases affect cash balances; the company notes adjusted free cash flow is not residual cash available for discretionary use.