Dine Brands Global, Inc. — Q1 2023 Form 10-Q
Reporting period: First fiscal quarter of 2023, January 2–April 2, 2023; the filing presents the quarter as ended March 31 for convenience. Comparisons are with the corresponding 2022 quarter. Amounts below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Business context and results
Dine Brands franchises Applebee’s, IHOP and Fuzzy’s Taco Shop, and also earns rental and financing revenue. It reported 3,600 franchised and company-operated restaurants combined. Fuzzy’s was acquired in December 2022. The prior-year quarter included 69 company-operated Applebee’s restaurants, which were refranchised in October 2022; the current quarter includes three company-operated Fuzzy’s restaurants.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $213.8 | $230.4 | Down 7.2% |
| Franchise revenue | $180.0 | $161.2 | Up $18.8 |
| Gross profit | $103.6 | $92.8 | Up 11.7% |
| General and administrative expense | $51.1 | $41.5 | Up 23.0% |
| Income before taxes | $36.2 | $34.2 | Up $2.0 |
| Net income | $27.4 | $24.9 | Up $2.5 |
| Diluted EPS | $1.74 | $1.45 | Up $0.29 |
Revenue declined mainly because Applebee’s company restaurant sales no longer consolidated after refranchising. Franchise and rental growth partly offset that effect. Gross profit increased, led by franchise and rental operations. G&A rose due primarily to personnel, professional services, occupancy and software costs; it included $1.9 million related to Fuzzy’s. The effective tax rate was 24.2%, versus 27.2%, reflecting higher stock-based compensation tax benefits and lower nondeductible executive compensation.
Sales and operating indicators
- Domestic same-restaurant sales rose 6.1% at Applebee’s and 8.7% at IHOP, chiefly from higher average checks, including menu price increases. The filing says both brands’ same-restaurant sales growth underperformed their respective industry segments.
- Applebee’s system-wide reported retail sales rose 5.6%; IHOP’s rose 11.4%. These are franchise-system sales, not Dine Brands revenue.
- Applebee’s off-premise sales were $263.4 million, or 23.1% of sales, compared with $297.0 million, or 27.6%. IHOP off-premise sales were $161.2 million, or 21.7%, compared with $161.7 million, or 24.6%.
- Applebee’s had a net reduction of five franchise restaurants; IHOP had a net addition of nine franchise and area-license restaurants during the quarter.
Cash flow, debt and liquidity
- Operating cash flow was $16.1 million, versus cash use of $7.8 million. The improvement largely reflected less cash used in working capital, including lower employee compensation payments and timing of disbursements.
- Investing activities used $12.7 million, including $16.0 million of property and equipment additions. Financing activities used $93.2 million, including $66.6 million of debt repayment, $16.0 million of dividends paid and $5.0 million of share repurchases.
- Adjusted free cash flow, a company-defined non-GAAP measure, was $2.3 million, compared with negative $10.1 million. The company cautions it is not residual cash available for discretionary use.
- Cash and cash equivalents were $181.6 million; restricted cash was $53.5 million. Total cash, cash equivalents and restricted cash, less $100.0 million of revolving borrowings, was $135.1 million, down from $225.0 million at year-end. The company reported $221.6 million of remaining availability under its $325 million facility, after letters of credit.
- Long-term debt, net of issuance costs, was $1,274.6 million, including $100.0 million classified as current. The filing reported a leverage ratio of approximately 4.5x and debt-service coverage ratio of approximately 4.0x; these are indenture-defined measures.
- Management said cash on hand, operating cash flow and facility availability should provide adequate liquidity for at least the next 12 months.
Material changes, outlook and risks
- Subsequent refinancing: On April 17, 2023, the company issued $500 million of 7.824% senior secured notes. Together with cash on hand, proceeds were used to repay approximately $585 million of Class A-2-I notes and pay transaction costs. This occurred after quarter-end and is not reflected in March 31 balances.
- Debt and covenant risk: The Class A-2-II notes have a June 2026 anticipated repayment date; failure to repay or refinance by that date can result in additional interest and rapid amortization. The revolving facility has a June 2027 renewal date, subject to extension conditions. Indenture-defined debt-service coverage thresholds can trigger cash sweeps, rapid amortization, manager termination or default consequences.
- Franchisee and operating risk: Higher commodity, labor and other operating costs could weaken franchisee margins and, in turn, affect royalties, rent and franchisee credit quality. The filing also cites general economic, restaurant-industry, technology/cybersecurity, development, supply and litigation risks.
- Guarantees and contingencies: Applebee’s refranchising arrangements leave potential lease-payment liability of up to $433.4 million; excluding unexercised options, the amount is $99.0 million. The company is involved in ordinary-course legal matters and says it does not currently expect them to have a material adverse effect, while noting outcomes are uncertain.
- The filing does not provide a clear new full-year financial guidance figure in the supplied text. Management described liquidity as adequate for at least 12 months; actual results may differ from forward-looking statements. No material changes to risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- How the April 2023 refinancing changes interest expense, debt maturities, principal payments and available liquidity.
- Whether Applebee’s and IHOP sales trends, traffic and performance relative to industry peers improve or weaken.
- Franchisee financial health, credit-loss reserves and exposure to operating-cost inflation.
- Capital spending, working-capital movements and the sustainability of operating and adjusted free cash flow.
- Potential exposure from lease guarantees, litigation and compliance with securitized-debt covenants.