DineEquity, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2016. The filing refers to the quarter as ended June 30, 2016 for convenience; the fiscal quarter actually ended July 3, 2016. The prior-year quarter ended June 28, 2015. The company operated Applebee’s and IHOP, with approximately 99% of its more than 3,700 restaurants franchised.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $160.3 million | $171.5 million | $323.8 million | $347.4 million |
| Gross profit | $97.4 million | $96.8 million | $196.8 million | $197.1 million |
| Net income | $26.8 million | $26.9 million | $52.4 million | $55.3 million |
| Diluted EPS | $1.45 | $1.40 | $2.82 | $2.88 |
| Operating cash flow | Not provided by quarter in the filing text | $53.9 million | $48.1 million |
- Q2 revenue fell 6.6%; six-month revenue fell 6.8%. Lower company-operated restaurant revenue after the 2015 refranchising of 23 Applebee’s restaurants and weaker Applebee’s comparable sales were key factors.
- Q2 gross profit increased 0.6%, while six-month gross profit declined 0.2%. Gross margin was approximately 60.8% in Q2 and 60.8% for the six-month period, compared with approximately 56.4% and 56.7%, respectively, in 2015.
- Q2 net income was nearly flat; six-month net income decreased 5.2%. Q2 diluted EPS rose 3.6%, principally as average diluted shares fell 3.7%, reflecting share repurchases. Six-month diluted EPS declined 2.1%.
- Six-month free cash flow, a company-defined non-GAAP measure, was $56.4 million, up from $49.7 million. Capital expenditures were $1.9 million; management expected approximately $8 million for full-year 2016.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $118.3 million, including $53.6 million held for gift card programs and advertising funds; restricted cash was $42.8 million. Cash and cash equivalents were $144.8 million at December 31, 2015.
- Long-term debt, net, was $1.281 billion. The company also reported $91.7 million of capital lease and financing obligations, including current maturities.
- The $1.3 billion Series 2014-1 Class A-2 Notes carried a 4.277% fixed rate. The $100 million variable funding facility was undrawn; $94.9 million was available after letters of credit. Leverage ratio was 4.59x and debt service coverage ratio was 5.38x.
- Six-month financing cash outflows included $35.0 million of share repurchases and $34.0 million of dividends. The company paid a $0.92-per-share dividend in the second quarter and declared another $0.92-per-share dividend for the third quarter.
- Management believed operating cash flow, cash on hand and available borrowing capacity would meet liquidity needs for the next 12 months.
Operating trends and changes versus prior year
- Applebee’s domestic same-restaurant sales decreased 4.2% in Q2 and 3.9% for the first six months, driven by lower traffic partly offset by higher average checks. Management said prior marketing initiatives had not reversed the traffic decline and planned to test additional initiatives.
- IHOP domestic same-restaurant sales increased 0.2% in Q2 and 0.8% for the first six months, as higher average checks more than offset lower traffic. Q2 marked IHOP’s 13th consecutive quarter of positive comparable sales.
- Net franchise restaurant development in Q2 was negative two for Applebee’s and positive 11 for IHOP. Franchise operations revenue increased, supported by IHOP development and fees, while Applebee’s franchise revenue declined.
- The 2015 refranchising reduced reported company-restaurant revenue but shifted those restaurants to royalty revenue. The filing estimates this reduced year-over-year gross profit by $0.1 million in Q2 and $0.7 million for the six-month period.
- General and administrative expenses rose $1.9 million in Q2 and $7.1 million for six months. Closure and impairment charges were $3.3 million and $3.7 million, respectively, including Kansas City facility exit costs.
Outlook, unusual items and risks
- For 2016, management expected IHOP franchisees to open 65–77 restaurants and Applebee’s franchisees to open 25–33. Actual openings may differ due to economic conditions, franchisee performance, construction delays, approvals and currency movements.
- A roughly $2.0 million reduction in deferred tax liabilities lowered Q2 tax expense. The effective tax rate was 32.5% for Q2 and 35.2% for the first six months, versus 38.2% and 38.3% in 2015.
- The Kansas City support-center consolidation generated reported costs; management expected an additional approximately $1 million charge after vacating the remaining floor in the second half of 2016. The filing gives differing estimates of total personnel and facility exit costs in its notes and MD&A.
- Potential lease guarantees for sold Applebee’s and other restaurants totaled $386.9 million, the maximum potential future payment exposure; no material guarantee liability was recorded. The company was also involved in ordinary-course litigation and tax disputes, including an IRS appeal expected to conclude during 2016. Management did not believe the proceedings would have a material adverse effect, but outcomes were not assured.
- Debt securitization covenants include cash-trapping and rapid-amortization triggers tied to debt service coverage and other events. The company cautioned that sustained restaurant traffic declines that cannot be offset by higher checks could hurt sales, royalties, franchise development and financial condition.
- No specific earnings or sales guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Applebee’s traffic and comparable-sales trends improve, and whether IHOP can sustain positive comparable sales amid declining traffic.
- Actual restaurant openings versus the 2016 brand targets, and any related franchisee closures or development delays.
- Debt covenant headroom, the availability of the variable funding facility and cash needs for dividends and repurchases.
- The size and timing of lease-guarantee, litigation and tax exposures, and the outcome of the IRS appeal.
- The final cost of the Kansas City consolidation; the filing’s differing estimates should be reconciled against subsequent disclosures.