DineEquity, Inc. — Form 10-Q, 2016 Third Quarter
Business context and reporting period. DineEquity owned and franchised Applebee’s and IHOP, with more than 3,700 restaurants, virtually all franchised. The filing presents the quarter and nine months ended September 30, 2016; the company’s fiscal third quarter actually ended October 2, 2016. Comparisons are with the corresponding 2015 periods.
Key financial results
| Metric | Three months 2016 | Three months 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $156.0 million | $162.4 million | $479.8 million | $509.8 million |
| Gross profit | $91.7 million | $96.7 million | $288.5 million | $293.8 million |
| Gross margin | 58.8% | 59.5% | 60.1% | 57.6% |
| Net income | $24.3 million | $24.3 million | $76.6 million | $79.6 million |
| Diluted EPS | $1.33 | $1.28 | $4.15 | $4.16 |
| Operating cash flow | Not separately stated | Not separately stated | $62.1 million | $70.6 million |
- Nine-month adjusted free cash flow, a company-defined non-GAAP measure, was $66.2 million versus $75.6 million. Capital expenditures were $3.5 million; the company expected approximately $8 million for full-year 2016.
- At September 30, cash and cash equivalents were $107.8 million, including $41.5 million held for gift card programs and advertising funds. Restricted cash was $35.0 million. Current assets were $280.4 million and current liabilities $206.4 million.
- Long-term debt was $1.282 billion; capital lease and financing obligations totaled $127.5 million, including current portions. The $1.3 billion senior notes carried a 4.277% fixed rate. The reported leverage ratio was 4.61x and debt service coverage ratio was 5.30x. The $100 million variable funding facility was undrawn, with $95 million available after letters of credit.
- Dividends paid in the first nine months totaled $50.8 million; the company also repurchased $45.0 million of stock. A $0.97-per-share fourth-quarter dividend was declared after quarter-end.
Changes and management commentary
- Third-quarter revenue fell 4.0%; nine-month revenue fell 5.9%. Nine-month net income declined 3.8%, while quarterly net income was essentially flat. Quarterly diluted EPS rose partly because of fewer shares outstanding after repurchases.
- Applebee’s domestic same-restaurant sales declined 5.2% for the quarter and 4.4% for nine months, primarily on lower traffic. IHOP sales declined 0.1% for the quarter but rose 0.5% for nine months; traffic weakness was partly offset by higher average checks.
- Management cited a weak restaurant-industry quarter, increased competition, slower wage growth and consumers allocating less disposable income to restaurant visits. Applebee’s traffic and sales declines exceeded those of the overall casual-dining segment, according to the company’s cited industry data.
- Revenue and profit comparisons were affected by the 2015 refranchising of 23 Applebee’s company-operated restaurants, a $2.5 million contribution to Applebee’s marketing fund, lower interest income as receivables were repaid, and a $2.5 million Kansas City facility lease-termination charge. The 2015 period also included an approximately $2 million gain on the restaurant asset sale.
- Management expected IHOP franchisees to open 65–77 restaurants and Applebee’s franchisees 25–33 in 2016, while warning actual openings could differ. It stated operating cash flow, available cash and borrowing capacity should meet liquidity needs for the next 12 months. No earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- A sustained traffic decline not offset by higher checks could reduce royalties, increase franchisee payment defaults and lead to fewer openings or restaurant closures.
- The company guaranteed or retained potential liability on assigned leases with maximum future payments of $372.5 million; no material guarantee liability was recorded. Ordinary-course litigation was disclosed, with no current expectation of material adverse impact, but outcomes were not assured.
- The company estimated approximately $1 million of additional Kansas City facility-exit charges when remaining space became available for sublease, expected in fourth-quarter 2016. Total planned personnel and facility-related costs were approximately $13 million; $11.2 million had been incurred cumulatively through September 30.
- Management expected adoption of the new lease accounting standard to materially increase reported assets and liabilities. Adoption was required beginning in fiscal 2019; the company was still assessing other effects.
Important facts for investors to verify
- Whether Applebee’s traffic and same-restaurant sales stabilize, and whether marketing initiatives improve results.
- Whether IHOP’s modest sales growth and planned restaurant development continue, and whether 2016 opening targets are achieved.
- Whether cash generation supports dividends and repurchases while the company carries substantial debt; monitor leverage, debt-service coverage and securitization triggers.
- Actual costs and timing to complete the Kansas City consolidation, plus the exposure and recoverability associated with lease guarantees.
- The effects of ongoing gift-card working-capital timing, declining interest income, and forthcoming lease and revenue accounting standards.