Dine Brands Global, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Dine Brands owns and franchises Applebee’s and IHOP, with 3,458 restaurants at quarter-end, the substantial majority franchised. The filing labels the period as ended March 31, 2021; the company’s fiscal quarter actually ran January 4 through April 4, 2021. Comparisons are with the corresponding 2020 quarter, which ended March 29.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $204.2 million | $206.9 million |
| Gross profit | $85.3 million | $84.4 million |
| Gross margin | 41.8% | 40.8% |
| Income before taxes | $24.0 million | $29.1 million |
| Net income | $25.6 million | $22.3 million |
| Diluted EPS | $1.51 | $1.31 |
| Operating cash flow | $30.6 million | $29.6 million |
- Revenue declined 1.3%. Franchise revenue was $141.0 million, rental revenue $26.1 million, company restaurant sales $35.9 million, and financing revenue $1.1 million.
- Gross profit increased 1.0%, but pretax income fell $5.1 million, reflecting higher G&A, interest expense, and closure and impairment charges.
- Net income rose despite lower pretax income, primarily because of a $1.6 million income tax benefit versus a $6.7 million tax provision a year earlier. The negative 6.6% effective tax rate was primarily due to excess stock-compensation tax benefits related to the former CEO’s departure.
- Cash and cash equivalents were $179.6 million at March 31, down from $383.4 million at year-end, principally after repayment of $220 million drawn on the revolver. Current and non-current restricted cash totaled $92.9 million.
- Capital expenditures were $2.4 million. Adjusted free cash flow, a company-defined non-GAAP measure, was $30.7 million, versus $27.5 million.
- Debt was $1.284 billion net of issuance costs, including $13.0 million current maturities. The company reported a 7.02x leverage ratio and approximately 3.45x debt service coverage ratio. No revolver borrowings remained; $221.7 million was available after letters of credit.
Material changes and operating trends
- Applebee’s domestic same-restaurant sales increased 11.9%; IHOP’s decreased 0.9%. Management cautions that pandemic restrictions and the shifted comparison weeks, including a 53rd week in fiscal 2020, distort comparisons.
- Off-premise sales increased substantially year over year: Applebee’s reported approximately $344 million (36.7% of sales mix) and IHOP approximately $183 million (33.3%).
- Franchise and rental revenue declined, mainly from restaurant closures, lease buy-outs, and lower franchisee sales-related rent. Company-operated Applebee’s sales increased, and company restaurant gross profit rose to $3.1 million from $1.0 million.
- The company recorded $2.0 million of closure and impairment charges, primarily revised or established closure reserves for about 35 IHOP restaurants.
- Operating cash flow increased modestly, but financing activities used $217.3 million, largely to repay the revolver. No common dividends or program repurchases occurred in the quarter.
Outlook, risks, and contingencies
- The company provided no specific financial guidance in the supplied filing text. Management said unrestricted cash, operating cash flow, and available revolver capacity should provide adequate liquidity for the next 12 months.
- COVID-19 remained a material uncertainty. As of March 31, more than two-thirds of restaurants had dining-room capacity limited to 50% or less. Future results depend on restrictions, customer return, vaccination developments, and consumer spending.
- Debt is securitized by substantially all domestic revenue-generating assets and domestic intellectual property. The reported leverage ratio exceeds the 5.25x threshold for suspending quarterly principal payments, so $3.25 million quarterly payments remain required; the ratio is not itself a covenant violation. Failure to meet specified DSCR thresholds can trigger cash sweeps, rapid amortization, manager termination, or default consequences.
- Applebee’s lease guarantees and potential continuing liabilities had a maximum stated exposure of $235.9 million; excluding unexercised renewal options, potential future payments were $34.2 million. Management did not expect current legal proceedings to have a material adverse effect, but gave no assurance of outcome.
- Other stated risks include franchisee financial health, restaurant closures, refinancing and debt compliance, cybersecurity and technology dependence, labor and supply availability, litigation, and general restaurant-industry conditions.
Important facts for investors to verify
- Whether post-quarter restaurant capacity improvements and sales trends persisted, particularly for IHOP and franchisees.
- Whether cash generation and available revolver capacity remain sufficient as pandemic effects and franchisee deferrals evolve.
- Debt repayment and securitization covenant metrics, including the leverage ratio, DSCR, and anticipated repayment dates of June 2024 and June 2026.
- The sustainability of reported EPS, given the one-time tax benefit, and the effect of restaurant closure reserves and franchisee credit estimates.
- Developments in lease guarantees, franchisee receivables, and any material litigation or other contingencies.