Dine Brands Global, Inc. — FY 2019 Form 10-K
Business context and reporting period. Dine Brands owns and franchises Applebee’s and IHOP. The filing covers the 52-week fiscal year ended December 29, 2019 (reported as December 31 for convenience); fourth-quarter figures are unaudited. The company operated or franchised 3,628 restaurants, with most locations franchised. Approximately 72% of revenue came from the franchise segments.
Financial performance
- Revenue: $910.2 million, up 16.6% from $780.9 million. The increase primarily reflects a full year of sales from 69 Applebee’s restaurants acquired in December 2018; company-restaurant sales were $131.2 million versus $7.1 million.
- Profit: Gross profit was $382.8 million, up 8.4%; gross margin was approximately 42.1%, compared with 45.2% in 2018. Net income was $104.3 million versus $80.4 million; diluted EPS was $5.85 versus $4.37. The effective tax rate declined to 24.6% from 27.4%.
- Cash flow and investment: Operating cash flow was $155.2 million, compared with $140.3 million. Adjusted free cash flow, a company-defined non-GAAP measure, was $148.8 million versus $140.9 million. Capital expenditures were $19.4 million.
- Liquidity: Cash and cash equivalents were $116.0 million; $56.6 million related to gift-card programs and IHOP advertising funds. Current restricted cash was $40.7 million and non-current restricted cash was $15.7 million. The $225 million revolving facility had $222.2 million available, net of letters of credit.
- Debt and obligations: Long-term debt, net of issuance costs, was $1.288 billion. The company refinanced approximately $1.28 billion of notes with $700 million at 4.194% and $600 million at 4.723%, with anticipated repayment dates in June 2024 and June 2026. Leverage was 4.57x and the debt-service coverage ratio was 4.27x. Operating lease liabilities were $431.8 million and finance lease obligations were $90.3 million. Stockholders’ deficit was $241.8 million.
- Shareholder returns: The company repurchased $109.7 million of stock and paid $46.9 million in dividends during 2019. It declared dividends of $2.76 per share for the year and announced a $0.76-per-share dividend in February 2020.
Material changes versus 2018
- Franchise gross profit rose $25.1 million, in part because the $30.0 million Applebee’s National Advertising Fund contribution made by Dine Brands in 2018 did not recur. Franchise revenue increased $7.3 million, while advertising revenue rose $14.7 million, partly reflecting higher Applebee’s franchisee contribution rates.
- Applebee’s domestic same-restaurant sales fell 0.7% for the year; IHOP’s rose 1.1%. System-wide sales changed by -3.0% for Applebee’s and +2.2% for IHOP. Applebee’s ended the year with 50 fewer restaurants overall; IHOP added 10 net locations.
- The 69 acquired Applebee’s restaurants contributed a full year of company sales, but only $1.9 million of incremental consolidated gross profit after accounting for foregone franchise royalties. Company restaurant operations generated $8.0 million of gross profit.
- Interest expense decreased to $60.4 million from $61.7 million. The 2019 results included an $8.3 million loss on extinguishment of debt. No goodwill or intangible-asset impairment was recorded in 2019; a $531.6 million impairment was recorded in 2017.
- Adoption of lease accounting guidance brought operating lease assets and liabilities onto the balance sheet. This increased reported assets and liabilities and limits direct balance-sheet comparisons with 2018.
Outlook, commentary and risks
- For 2020, management expected Applebee’s domestic development to result in net closures of 0–10 restaurants and IHOP domestic development to result in 40–50 net openings. The 2020 fiscal year was expected to contain 53 weeks. The filing does not provide a clear earnings or revenue forecast in the supplied text.
- Management highlighted off-premise sales growth: Applebee’s increased 22.4% for the year and represented 12.6% of sales mix; IHOP increased 32.3% and represented 9.5% of sales mix. IHOP franchisees had remodeled over 1,100 domestic restaurants under the Rise ’N’ Shine program.
- Key risks include high debt and securitization covenants tied to debt-service coverage and domestic system sales; substantial dependence on franchisees, including concentration among large Applebee’s operators; restaurant closures and franchise agreement expirations; and exposure to franchisee credit, lease guarantees, litigation, labor and food costs, cybersecurity, delivery partners, regulation and brand reputation.
- Lease guarantees had a maximum potential exposure of $257.2 million, though management recorded no material liability and stated exposure excluding unexercised renewal options was $40.4 million. Ordinary-course legal matters were not believed by management to be materially adverse, but outcomes remain uncertain.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. The auditor identified goodwill/tradename impairment assessment and lease discount-rate determination as critical audit matters.
Important facts for investors to verify
- Whether Applebee’s traffic and same-restaurant sales stabilize, and whether IHOP’s sales growth continues despite traffic declines.
- Whether franchisees meet IHOP development plans and manage Applebee’s closures, remodels and upcoming agreement expirations.
- Debt covenant headroom, refinancing progress before the 2024 and 2026 anticipated repayment dates, and availability of the revolving facility.
- Whether reported cash generation supports dividends and repurchases after considering restricted funds, debt service and lease commitments.
- How the acquired Applebee’s restaurants perform and whether Dine Brands refranchises them; also monitor lease guarantees and franchisee credit exposure.