DineEquity, Inc. (now Dine Brands Global, Inc.) — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 30, 2015; the company’s fiscal second quarter ended June 28, 2015. Comparisons are with the corresponding 2014 periods. The company owned, franchised and operated Applebee’s and IHOP, with more than 3,600 restaurants combined and approximately 99% franchised.
Financial performance
- Q2 revenue: $171.5 million, up 6.9% from $160.5 million. Franchise and restaurant revenue was $137.8 million; rental revenue $31.1 million; financing revenue $2.6 million.
- Q2 profit: Gross profit was $96.8 million versus $94.5 million; gross margin was approximately 56.4% versus 58.9%. Net income was $26.9 million, up 40.3%; diluted EPS was $1.40 versus $1.00.
- First-half performance: Revenue of $347.4 million, up 6.0%; gross profit of $197.1 million versus $191.5 million; net income of $55.3 million versus $40.0 million; diluted EPS of $2.88 versus $2.07. First-half gross margin was approximately 56.7%, compared with 58.4%.
- Cash flow: First-half operating cash flow was $48.1 million, down from $56.0 million. Free cash flow, a company-defined non-GAAP measure, was $49.7 million versus $54.6 million. Cash and cash equivalents were $104.4 million at June 30, including $59.9 million held for gift card programs and advertising funds.
- Debt and liquidity: Long-term debt was $1.3 billion, consisting of fixed-rate 4.277% notes. The company reported a 4.70x leverage ratio and 5.05x debt-service coverage ratio. Its $100 million variable funding facility had no borrowings; $91.6 million remained available after letters of credit. Management said cash, operating cash flow and available borrowing capacity should meet liquidity needs for the next 12 months.
- Capital returns: First-half dividends paid were $33.3 million; the declared quarterly dividend was $0.875 per share. The company repurchased $35.0 million of shares during the first half and had $63.0 million remaining under its authorization.
Material changes and drivers
- Management attributed profit growth primarily to lower interest expense following the fourth-quarter 2014 refinancing: Q2 interest expense fell to $15.7 million from $24.9 million; first-half expense fell to $31.3 million from $49.9 million.
- Revenue growth reflected higher same-restaurant sales, IHOP development and increased IHOP advertising contributions. Q2 domestic same-restaurant sales rose 6.2% at IHOP and 1.0% at Applebee’s. IHOP’s increase reflected higher check and traffic; Applebee’s growth reflected higher check partly offset by lower traffic.
- First-half operating cash flow declined despite higher net income, primarily because working-capital changes used $13.3 million of cash versus providing $6.7 million in the prior-year period. Management cited payment timing, higher income tax payments and marketing accruals.
- Financing revenue declined, including because $1.4 million of fees from two early lease terminations in 2014 did not recur. The company also expects interest revenue from rental and financing operations to decline progressively as receivables are repaid.
Outlook, risks and unusual items
- For 2015, management expected IHOP franchisees to open 50–60 restaurants and Applebee’s franchisees to open 30–40; actual openings may differ. Capital expenditures were expected to be approximately $9 million. The filing did not provide earnings or revenue guidance.
- On July 23, 2015, after quarter-end, the company sold and refranchised 23 Kansas City-area Applebee’s company-operated restaurants for approximately $9 million and expected a gain of approximately $2 million.
- Potential lease-guarantee exposure related to restaurants previously sold or refranchised was $368.1 million at June 30; no guarantee liability was recorded. The company noted ordinary-course litigation, including matters that may seek substantial damages, but did not expect currently pending proceedings to have a material adverse impact.
- Management warned that sustained restaurant traffic declines not offset by higher average checks could adversely affect results. Applebee’s Q2 traffic declined, while IHOP traffic increased. The notes also describe debt-service coverage triggers that can restrict cash, accelerate debt repayment or create default-related consequences if coverage falls substantially.
- Q2 impairment and closure charges were $0.5 million; first-half charges were $2.3 million. Management reported no significant indicators of goodwill or indefinite-lived intangible impairment. The company stated there were no material changes to its previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether IHOP’s strong sales and traffic trends continue and whether Applebee’s can stabilize traffic.
- Actual 2015 franchise openings and closures versus the stated brand targets.
- Cash generation after working-capital timing effects, alongside dividends and share repurchases.
- Debt covenant metrics, available facility capacity and any change in lease-guarantee or litigation exposure.
- The final proceeds and gain from the post-quarter Applebee’s refranchising transaction.