DineEquity, Inc. (now Dine Brands Global, Inc.) — Q3 2015 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2015; the fiscal third quarter ended September 27. The company franchises Applebee’s and IHOP and operates a small number of IHOP restaurants. Approximately 99% of its more than 3,600 restaurants were franchised.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $162.4 million | $162.9 million | $509.8 million | $490.6 million |
| Gross profit | $96.7 million | $91.6 million | $293.8 million | $283.2 million |
| Net income | $24.3 million | $18.9 million | $79.6 million | $58.9 million |
| Diluted EPS | $1.28 | $0.99 | $4.16 | $3.06 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $70.6 million | $102.4 million |
| Free cash flow | Not stated for quarter | Not stated for quarter | $75.6 million | $102.0 million |
Q3 gross margin was approximately 59.5%, compared with 56.3% a year earlier; nine-month gross margin was approximately 57.6%, compared with 57.7%. Revenue was nearly flat in Q3 but rose 3.9% for the nine-month period. Net income increased 28.4% in Q3 and 35.1% year to date. Lower interest expense after the 2014 refinancing and higher gross profit were key contributors; higher G&A partly offset the improvement.
Cash, debt and liquidity: Cash and cash equivalents were $105.9 million at September 30, including $42.1 million held for gift card programs and advertising funds. Long-term debt was $1.3 billion, consisting of fixed-rate 4.277% notes; the reported leverage ratio was 4.74x. The company had $91.6 million available under its $100 million variable funding facility, after letters of credit. Management said cash, operating cash flow and available borrowing capacity were expected to meet liquidity needs for the next 12 months. Nine-month capital spending was $5.8 million; approximately $8 million was expected for full-year 2015.
Material changes and operating trends
- Applebee’s domestic same-restaurant sales declined 0.5% in Q3, reflecting weaker traffic partly offset by higher average checks; the nine-month comparison remained up 1.2%.
- IHOP domestic same-restaurant sales rose 5.8% in Q3 and 5.6% year to date, supported by higher average checks and traffic. IHOP’s higher franchisee advertising contributions also lifted reported franchise revenue and expense.
- In July, the company refranchised 23 company-operated Applebee’s restaurants in Kansas City, received approximately $9 million in gross proceeds and recorded an approximately $2 million gain. It no longer operated company-owned Applebee’s restaurants.
- G&A increased $7.7 million in Q3, primarily from personnel costs, professional services, consumer research and depreciation. The quarter included approximately $3.3 million of employee-related consolidation costs; management described a roughly $3.6 million net charge related to the action.
- Cash from operations fell $31.8 million year to date, despite higher earnings. Management attributed the decline mainly to working-capital timing, including interest payments, marketing accruals and higher income-tax payments.
Outlook, risks and unusual items
- For 2015, management expected IHOP franchisees to open 50–60 restaurants and Applebee’s franchisees 35–45. Actual openings could differ because of economic conditions, franchisee execution, construction delays, regulatory approvals and currency movements.
- The company planned to consolidate restaurant and franchisee support functions at its Glendale headquarters and exit a significant part of the Kansas City support center. It estimated approximately $8 million of facility-exit costs and $5 million of employee and other personnel-related costs; most facility costs were expected when use of the space ceased, estimated in the first half of fiscal 2016.
- On October 1, 2015, the board approved a 5% increase in the quarterly dividend to $0.92 per share and replaced the former repurchase authorization with a new program of up to $150 million. During the first nine months, the company repurchased $50.0 million of shares and paid $49.8 million in dividends.
- Potential risks include sustained restaurant traffic weakness, debt-service and securitization triggers, lease guarantees, litigation and tax matters. The company disclosed $406.5 million of maximum potential lease-guarantee payments, with no material guarantee liability recorded. It said it did not expect pending litigation to have a material adverse effect, while noting outcomes could not be assured.
- The 2015 fiscal year was expected to contain 53 weeks. Management cautioned that interim results were not necessarily indicative of full-year results. No material changes to the prior annual-report risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- Whether Applebee’s traffic and same-store sales stabilize, and whether IHOP’s sales and traffic momentum continues.
- Actual timing and total costs of the Kansas City support-center consolidation versus estimates.
- Cash-flow and working-capital trends, including the effects of quarterly debt-interest payments and tax payments.
- Debt covenant and securitization metrics, available borrowing capacity, and capacity to sustain dividends and repurchases.
- Progress against restaurant-opening expectations and any developments in lease guarantees, litigation or the IRS tax appeal.