Dine Brands Global, Inc. — Q3 2019 Form 10-Q
Reporting period: Fiscal third quarter ended September 29, 2019 (presented as September 30); year-to-date results cover the nine months ended September 30, 2019. Comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
Dine Brands owns and franchises Applebee’s and IHOP. The company reported more than 3,600 restaurants, the substantial majority franchised. In December 2018, it acquired and began operating 69 Applebee’s restaurants, making year-over-year revenue comparisons less directly comparable.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $217.4 | $194.1 | $682.7 | $566.7 |
| Gross profit | $89.7 | $92.6 | $287.1 | $254.7 |
| Income before taxes | $31.7 | $31.2 | $101.9 | $78.6 |
| Net income | $23.9 | $23.6 | $77.0 | $53.4 |
| Diluted EPS | $1.36 | $1.29 | $4.27 | $2.90 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $105.6 | $61.6 |
- Q3 revenue rose 12.0%, largely because of the acquired Applebee’s restaurants; franchise revenue fell $5.9 million. Gross profit declined 3.1%, while net income increased modestly. Q3 gross margin was approximately 41.3%, versus 47.7% a year earlier.
- Nine-month revenue increased 20.5% and gross profit rose 12.7%. The prior-year period included $30.0 million of company contributions to the Applebee’s National Advertising Fund that did not recur. The 2019 period also benefited from the acquired restaurants, higher Applebee’s advertising contribution rates, and IHOP development. Nine-month gross margin was approximately 42.1%, versus 44.9%.
- Nine-month diluted EPS growth also reflected fewer weighted-average shares, primarily following repurchases. The effective tax rate was 24.5%, compared with 32.1%, partly because 2018 included a $5.7 million provision increase related to IRS audits. The company received a $13.3 million tax refund, including interest, in 2019.
- Nine-month adjusted free cash flow, a company-defined non-GAAP measure, was $100.8 million, up from $62.6 million. It is defined as operating cash flow plus receipts from notes and equipment contracts receivable, less capital expenditures; the company cautions it is not residual cash available for discretionary use.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $100.5 million; current and non-current restricted cash totaled $52.4 million. The company said $43.9 million of cash and cash equivalents was held for gift card programs and advertising funds, and about $30.0 million was held to meet state franchise-law net-worth requirements.
- Operating activities provided $105.6 million in the first nine months. Investing activities used $4.0 million and financing activities used $149.1 million; cash, cash equivalents and restricted cash decreased $47.5 million to $152.9 million.
- Long-term debt, net of issuance costs, was $1.288 billion. In June, the company refinanced approximately $1.28 billion of prior notes with $1.3 billion of new securitized senior notes: $700 million at 4.194% and $600 million at 4.723%. It recognized an $8.3 million loss on extinguishment of debt.
- The refinancing is secured by substantially all domestic revenue-generating assets and domestic intellectual property held by specified securitization entities. The new revolving facility permits up to $225 million; $222.2 million was available at quarter-end after letters of credit, and the company reported no draws since issuance.
- Leverage was 4.65x, below the 5.25x threshold for suspending scheduled principal payments; accordingly, no principal payment was required in Q4 2019. Debt-service coverage was 4.35x, above the disclosed 1.75x cash-flow-sweep and 1.20x rapid-amortization thresholds. These securitized-debt protections and triggers remain important liquidity considerations.
- ASC 842 adoption brought $370.5 million of operating lease right-of-use assets and $437.0 million of operating lease obligations onto the September 30 balance sheet. Total liabilities were $2.237 billion, exceeding total assets of $1.998 billion; stockholders’ deficit was $239.8 million.
Operating trends and material changes
- Applebee’s domestic same-restaurant sales declined 1.6% in Q3 and 0.1% year to date, with traffic weakness partly offset by higher average checks. Its effective franchise restaurant count fell by 134 year over year in Q3; closures and the acquisition of 69 restaurants contributed to the decline.
- IHOP domestic same-restaurant sales were approximately flat in Q3 and increased 1.1% year to date. IHOP had 23 more effective restaurants in Q3 year over year; nine-month net development was five restaurants.
- Off-premise sales grew 13.7% at Applebee’s and 23.9% at IHOP in Q3, reaching 12.2% and 9.3% of their respective sales mixes.
- Applebee’s franchisees’ advertising contribution rate was 4.25% in 2019, versus 3.50% for the first six months of 2018. Franchisees agreed to extend the temporary increase through December 31, 2020. Advertising revenue is matched by advertising expense over time and generally does not generate gross profit.
- The company repurchased $90.1 million of common stock and paid $35.3 million in dividends during the nine months. The Q3 dividend was $0.69 per share, paid after quarter-end; $11.8 million was payable at September 30. The 2019 repurchase authorization had $118.3 million remaining.
Outlook, risks and contingencies
- Management expected Applebee’s franchisees to close 30–40 net restaurants globally in 2019, mostly domestically, and IHOP franchisees and area licensees to add 10–20 net restaurants, mostly domestically. Actual openings and closures may differ because of economic conditions, construction and regulatory delays, franchisee performance, and other factors.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management said cash from operations, available cash, and borrowing capacity were expected to meet liquidity needs for the next 12 months.
- Risks cited include indebtedness and compliance with securitized-debt terms; reliance on franchisees and their financial health; restaurant sales, traffic and competition; delivery vendors and technology/cybersecurity; food safety, reputation, supply and labor; litigation; and regulatory and international-market risks.
- The company disclosed ordinary-course litigation, including matters that may be class actions, and stated it did not presently expect pending proceedings to have a material adverse impact, while noting outcomes cannot be assured. It guaranteed or had potential continuing liability for $264.6 million of Applebee’s franchisee lease payments; excluding unexercised option periods, potential liability was $41.2 million.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported revenue and earnings depend on acquired company-operated restaurants, advertising pass-throughs, and the temporary Applebee’s contribution-rate increase.
- Applebee’s traffic, same-store sales, franchisee closures and financial health, alongside IHOP’s sales and development trends.
- Debt servicing, leverage and debt-service coverage against securitization triggers, plus the collateral pledged and the notes’ anticipated repayment dates of 2024 and 2026.
- Cash availability after restricted funds, lease obligations, dividends, and remaining share repurchases; assess adjusted free cash flow alongside GAAP operating cash flow.
- Potential exposure from lease guarantees, litigation and tax matters, and the eventual effects of newly adopted credit-loss accounting guidance.