DineEquity, Inc. (now Dine Brands Global, Inc.) — Q1 2015 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2015 (the fiscal quarter ended March 29). DineEquity owned, franchised and operated Applebee’s and IHOP, with more than 3,600 restaurants, approximately 99% franchised. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $175.8 | $167.2 | +5.2% |
| Gross profit | $100.3 | $97.1 | +3.3% |
| Gross margin | 57.0% | 58.1% | Down 1.1 percentage points |
| Net income | $28.4 | $20.8 | +36.4% |
| Diluted EPS | $1.47 | $1.08 | +$0.39 |
| Operating cash flow | $41.1 | $52.8 | -$11.7 |
- Revenue growth was led by franchise operations, up $9.0 million to $124.5 million, including higher IHOP advertising-fund contributions, improved same-restaurant sales and IHOP restaurant development. Rental revenue rose $0.7 million; company restaurant revenue rose $1.0 million. Financing revenue fell $2.1 million, partly because $1.4 million of lease termination fees recorded in Q1 2014 did not recur.
- Gross profit increased, but gross margin declined; IHOP advertising contributions are recorded as both revenue and expense. General and administrative expense was essentially flat at $34.2 million.
- Interest expense declined to $15.6 million from $25.0 million following the Q4 2014 refinancing. The effective tax rate was 38.4%, compared with 38.2%.
- Free cash flow, as defined by the company, was $41.1 million, down $11.5 million. The operating cash flow decline primarily reflected working-capital timing, particularly interest-payment timing and marketing accruals, despite higher net income.
- Cash and cash equivalents were $133.5 million at quarter-end; the company said $66.4 million was held for gift-card programs and advertising funds. Current assets were $356.6 million and current liabilities were $242.5 million.
- Long-term debt was $1.30 billion, consisting of fixed-rate 4.277% notes. The $100 million variable funding facility was undrawn; $91.1 million remained available after letters of credit. Reported leverage ratio was 4.65x and debt service coverage ratio was 4.95x.
Material changes and operating trends
- Domestic same-restaurant sales increased 2.9% at Applebee’s and 4.8% at IHOP, versus declines of 0.5% and growth of 3.9%, respectively, in Q1 2014. Applebee’s improvement reflected higher average checks partly offset by slightly lower traffic; IHOP benefited from higher checks and increased traffic.
- Applebee’s franchise system sales increased 3.6%; IHOP franchise system sales increased 6.0%. These are franchisee sales, not DineEquity revenue.
- Applebee’s franchise restaurants declined by a net three during the quarter; IHOP franchise and area-license development was flat before company refranchising/reacquisitions. Results were supported by growth in the effective franchise base over the prior year.
- The company repurchased 140,096 shares for $15.0 million and paid $16.6 million in common dividends during the quarter. The declared Q1 dividend was $0.875 per share and was paid April 10, 2015.
Outlook, risks and unusual items
- Management expected franchisees to open 50–60 IHOP and 30–40 Applebee’s restaurants in 2015, primarily in domestic markets. Openings could vary with economic conditions, franchisee commitments, construction delays, regulatory approvals and currency movements. The filing provides no full-year earnings or revenue guidance.
- Management stated cash from operations, available cash and revolver capacity should meet liquidity needs for the next 12 months. Fiscal 2015 capital expenditures were expected to be approximately $9 million; the year was expected to contain 53 weeks.
- On April 20, 2015, the company agreed to sell and refranchise its 23 company-operated Applebee’s restaurants in the Kansas City area; closing was expected in Q3 2015.
- Closure and impairment charges were $1.8 million, including $1.5 million of closure charges, primarily related to two IHOP franchise restaurant closures and adjustments for previously closed restaurants. No significant impairment indicators were identified.
- The company reported maximum potential lease-guarantee exposure of $373.1 million related to previously sold restaurants; no material liability was recorded. It also disclosed ordinary-course litigation and an ongoing IRS appeals process concerning proposed assessments for tax years 2008–2010, while stating reserves were considered adequate.
- Debt is secured through a securitization involving substantially all domestic revenue-generating assets and domestic intellectual property. The notes include debt-service and other triggers that can restrict cash or accelerate repayment. Management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Applebee’s traffic trends and both brands’ same-restaurant sales remain sustainable; Q1 performance is not necessarily indicative of full-year results.
- The timing-related nature of the cash-flow decline and the amount of cash available for general corporate use after program-related funds and other restrictions.
- Debt covenant headroom, securitization triggers, scheduled debt service and the availability of the variable funding facility.
- Completion and financial impact of the planned sale of the 23 Applebee’s company-operated restaurants.
- Potential exposure from lease guarantees, litigation and the unresolved IRS tax appeal.