Dine Brands Global, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Dine Brands owns and franchises Applebee’s and IHOP, with a smaller company-operated restaurant base and rental and financing operations. The fiscal quarter began December 30, 2019 and ended March 29, 2020; the filing refers to it as the quarter ended March 31. Results reflect the initial effects of COVID-19, which began materially affecting operations in mid-March.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $206.9 million | $237.2 million | Down 12.8% |
| Gross profit | $84.4 million | $102.6 million | Down 17.7% |
| Income before taxes | $29.1 million | $41.1 million | Down $12.1 million |
| Net income | $22.3 million | $31.6 million | Down $9.3 million |
| Diluted EPS | $1.31 | $1.73 | Down $0.42 |
| Operating cash flow | $29.6 million | $28.9 million | Up $0.7 million |
| Adjusted free cash flow | $27.5 million | $27.7 million | Down $0.2 million |
- Franchise operations revenue declined $23.8 million to $145.1 million; company restaurant revenue fell $4.5 million to $31.3 million. Rental revenue was $29.0 million and financing revenue $1.5 million.
- Gross profit fell across franchise operations ($13.0 million), company restaurants ($3.2 million), rental operations ($1.6 million) and financing operations ($0.4 million). G&A expense decreased $5.2 million, partly offsetting the declines.
- Applebee’s domestic same-restaurant sales decreased 10.6%; IHOP’s decreased 14.7%. In the final two weeks of the quarter, same-restaurant sales fell approximately 78% at Applebee’s and 80% at IHOP.
- Cash and cash equivalents were $344.6 million at March 31, including $64.2 million held for gift card programs and advertising funds. Cash, cash equivalents and restricted cash totaled $395.1 million.
- Long-term debt, net of issuance costs, was $1.506 billion; face-value debt was $1.520 billion, including $220 million drawn on the revolving facility. The company had $2.2 million of remaining revolver availability after letters of credit. Net interest expense was $15.2 million.
- Leverage ratio was 4.79x and debt-service coverage ratio was 3.93x. Total current liabilities were $290.6 million; stockholders’ deficit was $236.4 million.
Material changes and management commentary
- COVID-19 restrictions and reduced customer traffic sharply impaired sales late in the quarter. At March 31, most domestic restaurants were operating with limited, primarily off-premise service; 251 Applebee’s and 347 IHOP domestic restaurants were temporarily closed. Of 249 international restaurants, 118 were open.
- Management withdrew its 2020 financial performance and restaurant development guidance because the pandemic’s duration, operating restrictions and impact on consumer spending were uncertain.
- To increase flexibility, the company drew $220 million on its $225 million revolver. It also stopped share repurchases, and the board decided not to declare a second-quarter dividend. Q1 included $26.5 million of program repurchases and $11.5 million of dividends paid.
- Management reduced discretionary costs, froze hiring, furloughed some employees and reduced hours at company-operated restaurants. Franchisees could defer certain fees and lease payments for up to two months case-by-case, and remodel and development obligations were deferred for up to 12 months. The company was discussing rent relief with landlords.
- Management stated it believed available cash and operating cash flow were adequate for at least the next 12 months. It also intended to increase the $16.4 million interest reserve for securitized debt.
- The company recorded a $0.5 million bad-debt expense, and adopted the current expected credit loss standard, increasing its allowance by $0.7 million and reducing retained earnings by $0.5 million net of tax. The allowance for credit losses totaled $13.4 million at quarter-end.
Risks, contingencies and unusual items
- COVID-19 could further reduce sales, franchisee financial health and liquidity, or cause additional closures, impairment charges, supply or staffing disruption. The company noted future impairment charges were possible but not reasonably estimable; no material goodwill or intangible impairment was identified at March 31.
- Debt terms include securitized-asset and cash-flow protections. Prescribed DSCR shortfalls can trigger cash-flow sweeping, rapid amortization, manager termination or default events. The reported 3.93x DSCR was above the stated trigger levels at quarter-end, but falling sales could affect future compliance.
- An IHOP franchisee operating 49 locations indicated it would cease operations at certain locations and initiated an assignment for the benefit of creditors in April 2020.
- The company had potential maximum liability of $253.2 million on Applebee’s franchisee lease guarantees, or $38.1 million excluding unexercised option periods. Litigation and other claims were described as arising in the ordinary course; management did not expect current proceedings to have a material adverse impact, but gave no assurance.
- The filing’s debt discussion gives inconsistent Class A-2-I voluntary prepayment make-whole amounts: approximately $32 million in the debt note and approximately $51 million in MD&A. Investors should verify the applicable figure.
Important facts for investors to verify
- How long restaurant restrictions and weak traffic persisted, and subsequent same-store sales, closures and franchisee payment trends.
- Cash availability and use restrictions, revolver headroom, debt covenants and DSCR performance as sales changed.
- Franchisee credit exposure, including allowance adequacy and developments involving the franchisee with 49 locations.
- Whether management later reinstated guidance, dividends or repurchases, and whether impairment or lease-guarantee exposures changed.
- The correct Class A-2-I make-whole amount and terms, given the inconsistent disclosures in this filing.