Dine Brands Global, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Dine Brands owns and franchises Applebee’s and IHOP. Its 3,437-restaurant system was approximately 98% franchised. The filing covers the quarter and six months ended June 30, 2022 for presentation purposes; the fiscal second quarter actually ended July 3, 2022. Comparisons are with the corresponding 2021 periods.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $237.8 million | $233.6 million | $468.2 million | $437.8 million |
| Gross profit | $95.7 million | $98.9 million | $188.4 million | $184.2 million |
| Income before tax | $32.5 million | $38.7 million | $66.7 million | $62.7 million |
| Net income | $24.0 million | $29.4 million | $48.8 million | $55.0 million |
| Diluted EPS | $1.45 | $1.69 | $2.90 | $3.19 |
| Gross margin | 40.2% | 42.3% | 40.3% | 42.1% |
Revenue and profit trends. Q2 revenue increased 1.8%, while gross profit fell 3.2%; higher food, beverage and labor costs at company restaurants and higher IHOP proprietary-product costs pressured results. Six-month revenue increased 6.9% and gross profit increased 2.3%, but net income declined, in part reflecting a higher tax provision. The effective tax rate was 26.8% for the first six months of 2022 versus 12.3% in 2021, when excess stock-compensation tax benefits lowered the rate.
Cash flow and liquidity. Operating cash flow for the first six months was $29.9 million, down from $106.0 million. Management attributed the decline chiefly to a $74.6 million unfavorable working-capital swing, including employee compensation payments and marketing disbursement timing. Adjusted free cash flow, a company-defined non-GAAP measure, was $23.1 million versus $107.3 million. Cash, cash equivalents and restricted cash totaled $329.7 million at June 30, 2022, down from $425.3 million at year-end 2021. Management said available cash, operating cash flow and borrowing capacity were expected to support liquidity for at least 12 months.
Debt and capital allocation. Long-term debt, net of issuance costs, was $1.281 billion. The $225 million revolving facility had no borrowings outstanding; $221.5 million remained available after letters of credit. Reported leverage was 4.27x and debt-service coverage was approximately 4.31x. The company repurchased 1.50 million shares for $104.1 million and paid $14.6 million of dividends during the six-month period. It declared a second-quarter dividend of $0.51 per share, payable in July.
Material changes versus the prior period
- Domestic same-restaurant sales increased 1.8% at Applebee’s and 3.6% at IHOP in Q2; for the first six months, they rose 7.6% and 10.1%, respectively. The filing says both brands underperformed their respective restaurant-industry segments in Q2 and the six-month period.
- Q2 company-restaurant gross margin decreased to 4.1% from 9.5%, with higher food, labor and delivery costs partly offset by higher sales.
- General and administrative expense increased 12.2% in Q2 and 8.1% for the six months, primarily due to personnel costs, travel and professional services.
- Six-month closure and impairment charges fell to $1.5 million from $4.6 million. 2022 charges primarily reflected revisions to closure reserves for IHOP locations and impairment of two IHOP properties.
- Cash flow comparisons were affected by working-capital timing; 2021 financing cash flows also included repayment of a $220 million revolving-facility borrowing.
Outlook, risks and unusual items
- The filing provides no new numerical financial guidance. Management’s liquidity assessment is forward-looking and subject to business and market uncertainty.
- Management highlighted COVID-19 resurgence and restrictions, inflation, commodity and labor costs, franchisee financial health, indebtedness and refinancing, and compliance with securitized-debt terms among relevant risks. Almost all domestic restaurants were operating without government-mandated restrictions; international conditions varied.
- Debt has anticipated repayment dates of June 2024 and June 2026. Failure to repay or refinance by those dates can trigger rapid amortization and additional interest under the indenture. Certain debt-service coverage shortfalls can also trigger cash sweeps, rapid amortization or default provisions.
- The company disclosed potential continuing liability of up to $215.8 million for Applebee’s lease guarantees; excluding unexercised options, the potential amount was $45.5 million. Management did not expect pending litigation to have a material adverse impact but cautioned that outcomes are uncertain.
- On July 26, 2022, after quarter-end, the company agreed to sell and refranchise its 69 company-operated Applebee’s restaurants in North and South Carolina; closing was expected in Q3 2022.
Important facts for investors to verify
- Whether restaurant-level inflation and weaker traffic trends continue to pressure margins and same-restaurant sales.
- Whether operating cash flow recovers from the working-capital outflow and supports dividends and share repurchases.
- Progress toward refinancing or repayment ahead of the 2024 and 2026 anticipated debt repayment dates, and continued compliance with securitized-debt thresholds.
- Completion and financial effects of the 69-restaurant Applebee’s sale and refranchising.
- Developments in franchisee credit quality, lease guarantees, litigation and other contingencies.