Business Context and Reporting Period
This summary covers the Form 10-Q filed by DineEquity, Inc. (now Dine Brands Global, Inc.) for the quarterly period ended September 30, 2009. The Company operates two primary restaurant concepts: Applebee's Neighborhood Grill & Bar and International House of Pancakes (IHOP). The reporting period reflects the Company's ongoing strategy to transition Applebee's from a company-operated model to a heavily franchised system, alongside continued operations in a challenging global economic environment.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $333.6 million | $1,058.8 million |
| Net Income | $13.5 million | $75.5 million |
| Net Income Available to Common Stockholders | $7.9 million | $57.3 million |
| Diluted EPS | $0.46 | $3.34 |
| Cash and Cash Equivalents | $105.1 million (as of Sep 30, 2009) | N/A |
| Operating Cash Flow (9 months) | N/A | $102.9 million |
| Total Debt (Long-term + Current) | $1.73 billion | N/A |
| Consolidated Leverage Ratio | 6.0x (as of Sep 30, 2009) | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased $57.6 million (14.7%) for the quarter and $199.3 million (15.9%) for the nine months compared to 2008. This was primarily driven by the franchising of 110 Applebee's company-operated restaurants since Q2 2008 and declines in same-store sales (Applebee's domestic franchise down 6.2% for the quarter; IHOP domestic franchise down 1.1%).
- Profitability Improvement: Despite revenue declines, the Company returned to profitability. Net income for the nine months was $75.5 million, a significant turnaround from a net loss of $17.3 million in the same period of 2008.
- Reduced Impairment Charges: Impairment and closure charges dropped significantly to $4.5 million for the quarter and $6.5 million for the nine months, compared to $28.5 million and $69.9 million, respectively, in 2008. The 2008 figures included a $40.6 million impairment related to a sale-leaseback transaction.
- Debt Reduction and Gains: The Company recognized a $38.8 million gain on the extinguishment of debt during the nine months ended September 30, 2009, resulting from the early retirement of approximately $129 million in face value of securitized debt. Total long-term debt decreased from $1.87 billion at year-end 2008 to $1.73 billion.
- Margin Expansion: Applebee's company-operated restaurant operating margin improved to 13.6% for the quarter (from 11.4% in 2008) and 14.7% for the nine months (from 12.0% in 2008), driven by cost controls and the sale of lower-margin units.
Guidance, Outlook, and Risks
- Franchising Strategy: Management continues to pursue a strategy to franchise approximately 98% of Applebee's restaurants. Proceeds from these sales are contractually required to be used to retire securitized debt. Two Applebee's restaurants were franchised in Q3 2009.
- Capital Expenditures: Estimated capital expenditures for fiscal 2009 are projected to be at the lower end of a range of $13 million to $16 million.
- Dividends: The Company suspended quarterly cash dividends on common stock in December 2008 to maximize financial flexibility. Series A Preferred Stock dividends of $4.75 million were paid in Q3.
- Debt Covenants: The Company is subject to strict covenants on its securitized debt, including a consolidated leverage ratio (currently 6.0x, well below the 7.0x-7.75x limits) and Debt Service Coverage Ratios (DSCR). The Applebee's three-month DSCR was 2.98x and IHOP was 3.47x, both comfortably above the 1.85x minimum threshold.
- Economic Risks: Management cites the global economic contraction, rising unemployment, and reduced consumer confidence as significant risks that could impact same-store sales and franchisee ability to pay royalties.
- Legal Proceedings: The Company is defending a collective action lawsuit (Gerald Fast v. Applebee's) regarding tipped worker wages. A trial was vacated pending an interlocutory appeal to the 8th Circuit. No loss contingency has been accrued.
Investor Verification Checklist
- Debt Refinancing: Verify the Company's ability to refinance or repay approximately $1.8 billion of securitized debt, with accelerated payment dates potentially triggering in December 2012 if not refinanced.
- Covenant Compliance: Monitor the consolidated leverage ratio and DSCR closely, as the leverage ratio calculation includes gains on debt extinguishment which are non-recurring and will drop out of the rolling 12-month calculation.
- Franchising Execution: Assess the pace of Applebee's franchising and the proceeds generated, as this is the primary mechanism for debt reduction and liquidity generation.
- Same-Store Sales Trends: Track the recovery of same-store sales for both Applebee's and IHOP, which have been negatively impacted by the economic downturn.
- Legal Exposure: Monitor the status of the Gerald Fast collective action, as a loss could impact future cash flows.