Dine Brands Global, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative quarter ended April 2, 2023. Dine Brands franchises Applebee’s, IHOP and Fuzzy’s Taco Shop, with rental and financing operations and one company-operated Fuzzy’s restaurant.
Key financial results
| Metric | Q1 2024 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $206.2 million | $213.8 million | Down 3.5% |
| Gross profit | $97.4 million | $103.6 million | Down 6.0% |
| Gross margin | 47.2% | 48.5% | Down 1.3 percentage points |
| Income before taxes | $24.0 million | $36.2 million | Down $12.2 million |
| Net income | $17.5 million | $27.4 million | Down $9.9 million |
| Diluted EPS | $1.13 | $1.74 | Down $0.61 |
| Cash provided by operating activities | $30.6 million | $16.1 million | Up $14.5 million |
| Capital expenditures | $3.3 million | $16.0 million | Down $12.7 million |
| Adjusted free cash flow (non-GAAP) | $29.8 million | $2.3 million | Up $27.5 million |
Revenue declines reflected lower franchise and rental revenue. Profit fell further due to lower gross profit, higher interest expense and G&A, and the absence of a $1.7 million debt-extinguishment gain recognized in the prior-year quarter. Net interest expense increased $3.4 million to $18.1 million, primarily reflecting higher-rate securitized debt and credit-facility borrowing. G&A rose $1.1 million, mainly from compensation, predominantly stock-based compensation, and consumer research. The effective tax rate increased to 27.3% from 24.2%, primarily because of a lower stock-compensation tax deduction.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $145.0 million at March 31, 2024; restricted cash was $67.1 million. Cash, cash equivalents and restricted cash totaled $212.1 million.
- Long-term debt, net of issuance costs, was $1.185 billion, including $100 million classified as current. The $500 million 2023 notes bear 7.824% fixed interest; the $594 million 2019 notes bear 4.723%. The $100 million revolving-facility balance had a 7.94% rate at quarter-end.
- The $325 million revolving facility had $221.6 million available after $100 million outstanding and $3.4 million pledged for letters of credit.
- Leverage was approximately 4.3x and debt-service coverage approximately 3.5x. Quarterly principal payments on the fixed-rate notes may be suspended while leverage is at or below 5.25x. Debt documents include cash-sweep, rapid-amortization and default triggers tied to coverage ratios and other events.
- Quarterly dividends declared were $0.51 per share. The company repurchased 128,479 shares for $6.0 million, with $139.3 million remaining under its $250 million authorization.
Operating trends and material changes
- Reported system-wide sales were $2.050 billion, down from $2.125 billion. Domestic same-restaurant sales decreased 4.6% at Applebee’s, 1.7% at IHOP and 9.8% at Fuzzy’s. Management attributed declines chiefly to lower traffic, partly offset by menu pricing at Applebee’s and IHOP.
- Applebee’s franchise revenue decreased $2.2 million, and its effective restaurant count was down 38 year over year. IHOP franchise revenue increased $0.6 million, supported by effective restaurant growth and proprietary product sales. Fuzzy’s franchise revenue decreased $0.7 million amid lower sales and restaurant count.
- Rental revenue declined $2.5 million, primarily because of lease buyouts in the prior-year quarter. Rental gross profit fell $2.8 million.
- Operating cash flow improved largely due to working-capital timing, including income-tax payments, a tax-settlement collection and receivables. Lower capital spending also contributed to higher adjusted free cash flow; management cautions this non-GAAP measure is not residual cash available for discretionary use.
Outlook, risks and contingencies
- The filing provides no new quantified financial guidance or specific forward outlook. Management says quarterly results are not necessarily indicative of full-year results.
- Management identifies franchisee financial health and restaurant operating costs—including inflation, labor and commodities—as risks that can affect franchisee margins and, in turn, royalties and restaurant continuity. Other disclosed risks include indebtedness and refinancing, securitized-debt covenant compliance, technology and cyber incidents, litigation, supply disruptions and consumer demand.
- Dine Brands has guaranteed or may have continuing liability for Applebee’s franchisee lease payments with a maximum potential amount of $393.1 million; excluding unexercised options, potential payments are $103.7 million. The filing does not state that this amount is currently payable.
- The company reports ordinary-course lawsuits and claims, including some purported class actions, but does not currently expect pending matters to have a material adverse impact; it cautions outcomes cannot be assured. No material changes to previously reported risk factors or market-risk disclosures were reported.
- The $500 million 2023 notes have an anticipated repayment date in June 2029 and a potential prepayment make-whole premium of approximately $35.5 million as of quarter-end. The 2019 notes have an anticipated repayment date in June 2026.
Investor facts to verify
- Whether same-store sales and traffic trends, particularly at Applebee’s and Fuzzy’s, stabilize or continue to weaken.
- Whether franchisee financial condition, restaurant closures and operating-cost pressures affect royalty revenue, development and lease-related exposure.
- Whether cash generation and the $221.6 million of facility availability remain adequate alongside debt service, dividends and repurchases.
- Debt refinancing plans and compliance with coverage requirements, especially approaching the 2026 and 2029 anticipated repayment dates.
- The timing and potential cash impact of lease guarantees, litigation and other contingencies.