DineEquity, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended January 1, 2017, presented as December 31, 2016. The year had 52 weeks; FY 2015 had 53 weeks. The filing covers Applebee’s and IHOP, predominantly franchised restaurant systems.
Business context and financial performance
- At year-end, the company had 3,749 restaurants; all 2,016 Applebee’s and all but 10 IHOP restaurants were franchised or area-licensed. Approximately 96% of FY 2016 revenue came from franchise and rental operations.
- Revenue: $634.0 million, down 6.9% from $681.1 million. The 2015 extra week accounted for an estimated $13.8 million of revenue.
- Profit: Gross profit was $379.4 million, down 4.9%; gross margin was approximately 59.8%, versus 58.6% in 2015. Net income was $98.0 million, down 6.6%; diluted EPS was $5.33, down 3.4% from $5.52.
- Cash flow: Operating cash flow was $118.1 million, versus $135.5 million. Adjusted free cash flow, a company-defined non-GAAP measure, was $122.5 million, versus $142.3 million. Capital expenditures were $5.6 million; management expected approximately $12 million in FY 2017.
- Liquidity: Cash and equivalents were $140.5 million; $63.3 million related to gift card programs and IHOP advertising funds. Current and non-current restricted cash totaled approximately $45.0 million. The $100 million variable funding facility was undrawn, with $95.0 million available after letters of credit.
- Debt: Long-term debt, net, was $1.283 billion, principally $1.3 billion of 4.277% secured notes; capital lease obligations were $87.8 million and financing obligations were $39.6 million. Leverage was 4.62x and debt-service coverage was 5.12x. Notes are expected to be repaid or refinanced by September 2021; failure to do so would trigger materially higher interest.
Material changes versus prior period
- Applebee’s domestic same-restaurant sales fell 5.0% for the year and 7.2% in Q4; IHOP’s declined 0.1% for the year and 2.1% in Q4. Both brands reported weaker customer traffic, partly offset by higher average checks.
- Applebee’s franchise revenue and profit declined, reflecting lower sales, lower fees and higher bad-debt expense. Applebee’s ended the year with 17 fewer restaurants, after 29 openings and 46 closures. IHOP achieved 50 net restaurant additions.
- Q4 revenue was $154.2 million, versus $171.3 million; gross profit was $90.9 million, versus $105.2 million; net income was $21.3 million, versus $25.4 million; and diluted EPS was $1.18, versus $1.35. Comparisons are affected by the extra week in FY 2015 Q4.
- FY 2016 included $5.1 million of closure and impairment charges, including $2.9 million of Kansas City facility exit costs. The company completed consolidation of Applebee’s support functions into Glendale; cumulative consolidation costs were $12.1 million across 2015–2016.
- Interest expense fell to $61.5 million from $63.3 million, while the much larger year-over-year reduction versus 2014 reflects the 2014 refinancing. Net income also benefited in comparison with 2014 from the absence of that year’s $64.9 million debt-extinguishment loss.
Outlook, risks and unusual items
- For 2017, management projected 20–30 Applebee’s openings and 75–90 IHOP openings, while anticipating 40–60 Applebee’s closures as part of system optimization. Actual development and closures may vary.
- Management stated that operating cash flow, available cash and available variable-facility borrowings should meet 2017 liquidity needs. The board raised the quarterly dividend to $0.97 per share; a February 2017 declaration was payable in April 2017.
- Applebee’s franchise-unit goodwill was identified as at risk under the company’s impairment sensitivity assessment, although no goodwill or tradename impairment was recorded in 2016. Weaker long-term assumptions could lead to future impairment charges.
- Key risks include sustained sales and traffic declines, franchisee financial distress and closures, concentration among large Applebee’s franchisees, substantial secured debt and restrictive covenants, lease guarantees, litigation, labor and food costs, and cybersecurity or operational disruptions. Maximum potential lease-guarantee exposure was $366.8 million; no material liability was recorded.
- Subsequent event: CEO Julia Stewart announced her resignation effective March 1, 2017. The company expected approximately $5.8 million of cash separation payments and a $2.9 million first-quarter 2017 charge for accelerated equity vesting.
- The 2017 outlook is subject to restaurant-industry and competitive uncertainty. The filing also noted adoption of new lease accounting in 2019 was expected to materially increase reported assets and liabilities; the impact of new revenue guidance on franchise-fee timing was still being evaluated.
Most important facts for investors to verify
- Whether Applebee’s sales and traffic trends stabilize, and whether projected closures affect royalties, franchisee collections or goodwill valuation.
- Franchisee credit quality, including the rise in bad-debt expense and the company’s receivables and exposure to concentrated franchise operators.
- Debt covenant headroom, refinancing plans for the 2021 anticipated repayment date, and the availability of cash after advertising, gift-card and securitization-related balances.
- Whether IHOP development and remodel initiatives translate into sustained comparable-sales growth and franchisee profitability.
- The assumptions behind adjusted free cash flow and shareholder returns, including dividends and repurchases, alongside lease guarantees and other contractual commitments.