Dine Brands Global, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended October 2, 2022 (referred to in the filing as September 30, 2022); nine-month comparison is against the same period of 2021. The company owns and franchises Applebee’s and IHOP; approximately 98% of its 3,436 restaurants were franchised.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Total revenue | $233.2 million, up 2.0% | $701.4 million, up 5.2% |
| Gross profit | $94.3 million, down $0.3 million | $282.8 million, up $4.0 million |
| Income before taxes | $28.7 million vs. $30.8 million | $95.4 million vs. $93.4 million |
| Net income | $20.9 million vs. $23.1 million | $69.8 million vs. $78.1 million |
| Diluted EPS | $1.32 vs. $1.33 | $4.22 vs. $4.52 |
| Operating cash flow | Not presented for the quarter | $63.5 million vs. $145.6 million |
Quarterly revenue growth came chiefly from franchise and company restaurant sales. Nine-month franchise revenue rose $25.3 million, supported by higher same-restaurant sales; company restaurant gross profit fell $2.5 million as higher food, labor and delivery costs more than offset sales growth. Nine-month G&A increased $9.1 million to $131.9 million. The effective tax rate rose to 26.9% from 16.4%, largely because 2021 benefited from excess tax benefits on stock compensation.
Cash, debt and capital allocation
- At September 30, cash and cash equivalents were $355.3 million; current and non-current restricted cash totaled $68.9 million. The company reported $221.6 million of borrowing capacity on its revolving facility and said liquidity should be adequate for at least 12 months.
- Debt carrying value was $1.381 billion, including $100 million drawn on a new $325 million revolving facility, bearing a variable rate of 5.50% at period-end. The leverage ratio was 3.90x and debt-service coverage ratio was approximately 4.15x.
- Nine-month operating cash flow fell by $82.1 million; management cited working-capital use, including employee compensation payments and timing of marketing and other disbursements. Adjusted free cash flow, a non-GAAP measure, was $52.4 million versus $146.1 million.
- The company repurchased $113.6 million of stock and paid $30.8 million in dividends during the first nine months. It declared dividends of $1.48 per share during that period.
Changes, outlook and risks
Domestic same-restaurant sales increased 3.8% at Applebee’s and 1.9% at IHOP for the quarter, with higher average checks partly offset by lower customer traffic. For the first nine months, increases were 6.3% and 7.2%, respectively. Management attributed comparisons partly to the easing of pandemic restrictions; inflation in food, labor and other operating costs remained a pressure. No specific financial guidance is provided in the filing text.
In July, Dine Brands agreed to sell and refranchise 69 company-operated Applebee’s restaurants in North and South Carolina. The sale closed October 25, 2022, after quarter-end. The disposal group was classified as held for sale, and a $1.1 million impairment was recorded in the quarter. The new revolving facility replaced a prior facility; termination generated a $1.2 million debt-extinguishment loss.
Risks highlighted include COVID-19 and potential restrictions, inflation and consumer spending, franchisee financial health, substantial indebtedness and securitized-debt covenant triggers, refinancing needs, restaurant development, labor and supply availability, litigation, cyber and technology risks, and the ability to achieve financial guidance. The company reported no material change to its previously disclosed risk factors and stated disclosure controls were effective.
Investor verification priorities
- Confirm the post-quarter sale terms and financial effect of refranchising the 69 Applebee’s restaurants, including the impact on recurring royalties and rent.
- Review the drivers and sustainability of lower operating cash flow and adjusted free cash flow, especially working-capital timing and capital spending.
- Assess variable-rate borrowing, available revolver capacity, debt maturities and securitization triggers; anticipated repayment dates for the fixed-rate notes are June 2024 and June 2026.
- Track same-restaurant sales, traffic, franchisee margins and restaurant closures as inflation and consumer demand evolve.
- Reconcile reported dividends and repurchases with liquidity needs and the remaining authorization under the $250 million repurchase program.