Dine Brands Global, Inc. — Q2 2023 Form 10-Q
Business context and period. Dine Brands franchises Applebee’s, IHOP and Fuzzy’s Taco Shop, and also earns rental and financing revenue. The fiscal second quarter ended July 2, 2023; the filing presents the quarter as ended June 30 for convenience. The filing compares the three and six months ended June 30, 2023 and 2022. Fuzzy’s, acquired in December 2022, is included in current results but lacks a prior-year comparison.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $208.4 million | $237.8 million | $422.2 million | $468.2 million |
| Gross profit | $97.3 million | $95.7 million | $201.0 million | $188.4 million |
| Income before taxes | $24.4 million | $32.5 million | $60.6 million | $66.7 million |
| Net income | $18.2 million | $24.0 million | $45.7 million | $48.8 million |
| Diluted EPS | $1.16 | $1.45 | $2.91 | $2.90 |
| Net interest expense | $17.8 million | $15.4 million | $32.5 million | $30.9 million |
Margins. Gross profit was about 46.7% of revenue in Q2 versus 40.2% a year earlier; for the six-month periods, about 47.6% versus 40.2%. These calculated consolidated margins reflect a major change in the mix of company-operated and franchised restaurant revenue. The filing does not present a single consolidated operating-margin measure.
Cash flow and liquidity. For the first six months, operating cash flow was $42.7 million (up from $29.9 million). Capital expenditures were $22.8 million; adjusted free cash flow, a company-defined non-GAAP measure, was $24.1 million versus $23.1 million. Investing used $16.6 million and financing used $194.3 million. Cash, cash equivalents and restricted cash totaled $156.8 million at period-end; cash and cash equivalents alone were $98.0 million. After the $100 million revolving facility borrowing, cash and restricted cash net of that borrowing were $56.9 million. Management said available unrestricted cash, operating cash flow and facility capacity should provide adequate liquidity for at least 12 months.
Debt. Long-term debt, net of issuance costs, was $1.184 billion, including $100 million outstanding on the revolving facility; the balance-sheet current portion was $100 million. The facility had $221.6 million available to borrow after letters of credit. The company’s leverage ratio was approximately 4.5x and debt-service coverage ratio approximately 3.7x. In April, the company issued $500 million of 7.824% notes and used proceeds to repay approximately $585 million of 2019 notes; the refinancing contributed to higher interest expense. The 2023 notes have an anticipated repayment date in June 2029, and the remaining 2019 notes in June 2026. A $100 million debt-repurchase authorization was approved.
Changes and operating drivers
- Revenue declined 12.4% in Q2 and 9.8% for the first half, primarily because Applebee’s 69 company-operated restaurants were refranchised in October 2022. Franchise revenue increased, including contributions from Fuzzy’s.
- Q2 domestic same-restaurant sales were down 1.0% at Applebee’s and up 2.1% at IHOP. For the first half, they increased 2.5% and 5.3%, respectively. Management attributed sales gains principally to higher average checks, offset by lower traffic; Applebee’s Q2 decline was driven mainly by traffic.
- Franchise operations gross profit increased $3.6 million in Q2 and $13.0 million in the first half. However, G&A increased $3.8 million and $13.3 million, respectively, and net interest expense also rose.
- Net income fell in Q2 despite higher gross profit. The filing attributes the pretax decline primarily to higher G&A and losses on asset dispositions, including costs related to stopping the IHOP Flip’d initiative. First-half diluted EPS was broadly unchanged, supported in part by fewer weighted-average shares.
Outlook, risks and unusual items
- The filing does not provide a clear new numerical full-year guidance range. Management cautions that interim results are not necessarily indicative of full-year results.
- The company recorded $2.0 million of Q2 losses on asset dispositions and $1.7 million of debt-extinguishment loss associated with the refinancing. First-half results include a $1.7 million gain from purchasing notes below par, offset by the write-off of debt issuance costs.
- Closure and impairment charges were $0.8 million in Q2 and $1.3 million for the first half; 2023 impairment primarily related to technology for the discontinued IHOP Flip’d initiative. The company also reported bad-debt expense, including increased franchise-related reserves.
- Key disclosed risks include inflation and restaurant cost pressures, high indebtedness and refinancing needs, franchisee financial health and credit losses, compliance with securitized-debt covenants, cyber and technology risks, litigation, and execution of restaurant development plans. A covenant-triggering event could restrict cash or accelerate debt amortization; current reported leverage and coverage ratios were above the stated trigger levels.
- Dine Brands has guaranteed or may remain liable for up to $424.2 million of lease payments on refranchised Applebee’s locations; potential liability excluding unexercised renewal options was $95.8 million. Management does not expect pending legal matters to have a material adverse impact, but gives no assurance of that outcome.
Important facts for investors to verify
- How Applebee’s and IHOP traffic, average checks and same-store sales are trending, and whether gains are keeping pace with their respective industry segments.
- Whether franchisee credit quality and bad-debt reserves remain adequate, particularly amid food, labor and other operating-cost pressures.
- The cash cost and refinancing plan for the 7.824% notes and other debt, covenant headroom, and how much cash is unrestricted versus reserved or program-related.
- The financial effects of refranchising, Fuzzy’s integration, discontinued Flip’d costs and any future impairment or closure charges.
- Potential exposure under Applebee’s lease guarantees, and the sustainability of dividends and share repurchases alongside debt and capital-spending needs.