Dine Brands Global, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022, compared with the same period in 2021. The company’s fiscal quarter actually ended April 3, 2022; the filing uses March 31 for convenience. Dine Brands owns and franchises Applebee’s and IHOP. It reported 3,431 restaurants, approximately 98% franchised.
Financial results and position
- Revenue: $230.4 million, up 12.8% from $204.2 million. Franchise operations contributed $161.2 million, rental operations $28.8 million, company restaurants $39.4 million, and financing operations $1.0 million. Advertising revenue is matched by advertising expense.
- Profit: Gross profit was $92.8 million, up 8.8%; gross margin was approximately 40.3%, versus 41.8%. Pretax income rose to $34.2 million from $24.0 million. Net income was $24.9 million, down from $25.6 million; diluted EPS was $1.45 versus $1.51.
- Taxes: The effective tax rate was 27.2%, versus a 6.6% tax benefit in 2021. The prior-period rate benefited from excess stock-compensation tax benefits related to the former CEO’s departure.
- Operating cash flow and investment: Operating activities used $7.8 million, versus $30.6 million provided in 2021. Capital expenditures were $5.3 million. Adjusted free cash flow, a company-defined non-GAAP measure, was negative $10.1 million, compared with positive $30.7 million.
- Cash and liquidity: Cash and cash equivalents were $294.7 million at March 31, down from $361.4 million at year-end. Including restricted cash, total cash was $358.3 million. The company had $221.5 million of available revolving-facility capacity and stated that cash, operating cash flow, and availability were expected to cover liquidity needs for the next 12 months.
- Debt and leases: Long-term debt, net, was $1.280 billion. The securitized notes carry fixed rates of 4.194% and 4.723%; the company had no revolving-facility borrowings. Leverage was 4.05x and debt service coverage was approximately 4.6x. Operating and finance lease obligations totaled approximately $457.2 million, including current and long-term amounts.
- Returns of capital: The company repurchased 588,108 shares for $41.4 million during the quarter and paid $14.6 million in dividends. A new repurchase authorization of up to $250 million became effective April 1, 2022.
Material changes and operating trends
- Domestic same-restaurant sales rose 14.3% at Applebee’s and 18.1% at IHOP. Management attributed growth to improved restaurant operating conditions, higher traffic, and higher average checks, including menu price increases. Comparisons benefited from pandemic-related restrictions in the 2021 period.
- Revenue growth and lower closure and impairment charges helped lift pretax income. The 2022 period also included a $1.3 million gain on asset dispositions, primarily from selling land and buildings at two IHOP locations.
- Company-restaurant gross profit fell to $2.0 million from $3.1 million; margin declined to 5.1% from 9.0%, reflecting higher food, labor, and delivery costs. The company operates 69 Applebee’s restaurants.
- Franchise gross profit increased to $83.2 million from $76.0 million. Franchise gross profit as a percentage of franchise revenue decreased to 51.6% from 53.9%, partly reflecting higher IHOP franchise expenses and advertising activity.
- Operating cash flow deteriorated primarily because working capital used $42.6 million, including higher bonus and employee-compensation payments and the timing of marketing disbursements.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance for 2022. Management’s stated liquidity expectation is for the next 12 months, based on available cash, operating cash flow, and the undrawn credit facility.
- Management identified continuing uncertainty from COVID-19 and potential variants, including possible renewed operating restrictions and effects on consumer spending. At March 31, 2022, almost all domestic restaurants operated without government-mandated restrictions; international conditions varied.
- Other highlighted risks include inflation in food and labor costs, franchisee financial health, the company’s substantial debt and securitization requirements, refinancing, restaurant development, supply interruptions, technology and cyber risks, litigation, and the ability to retain employees.
- The secured notes have anticipated repayment dates in June 2024 and June 2026. Failure to repay or refinance by those dates can trigger rapid amortization and additional interest. The indenture also provides for cash-sweep, rapid-amortization, manager-termination, and default consequences if specified coverage tests are breached. Reported coverage ratios were above the stated trigger levels at quarter-end.
- The company has guaranteed or may remain liable for Applebee’s lease payments with a maximum potential exposure of $219.6 million; excluding unexercised renewal options, the amount is $48.0 million. The company also disclosed ordinary-course legal proceedings; management did not expect them to have a material adverse impact, while noting outcomes cannot be assured.
Important facts for investors to verify
- Whether same-restaurant sales growth persists once comparisons are less affected by pandemic restrictions, and whether Applebee’s and IHOP continue to trail their respective industry segments.
- Whether higher food, labor, and delivery costs pressure company-operated margins and franchisee economics.
- Whether working-capital outflows reverse and operating cash flow supports dividends and repurchases.
- Debt refinancing plans and progress ahead of the June 2024 and June 2026 anticipated repayment dates, including compliance with securitization tests.
- Actual use of the new $250 million repurchase authorization and its effect on cash, leverage, and per-share results.