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DIN > SEC Filings for DIN > Form 10-Q on 2-May-2013All Recent SEC Filings

Show all filings for DINEEQUITY, INC

Form 10-Q for DINEEQUITY, INC


2-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

Statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading "Risk Factors" in our most recent Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the United States Securities and Exchange Commission. The forward-looking statements contained in this report are made as of the date hereof and the Company assumes no obligation to update or supplement any forward-looking statements.

You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this report.

Overview

The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Except where the context indicates otherwise, the words "we," "us," "our" and the "Company" refer to DineEquity, Inc., together with its subsidiaries that are consolidated in accordance with United States generally accepted accounting principles ("U.S. GAAP").

Through various subsidiaries we own, franchise and operate two restaurant concepts: Applebee's Neighborhood Grill & Bar® ("Applebee's"), in the bar and grill segment of the casual dining category of the restaurant industry, and International House of Pancakes® ("IHOP®"), in the family dining category of the restaurant industry. References herein to Applebee's and IHOP restaurants are to these two restaurant concepts, whether operated by franchisees, area licensees or the Company.

Domestically, Applebee's restaurants are located in every state except Hawaii, while IHOP restaurants are located in all 50 states and the District of Columbia. Internationally, Applebee's restaurants are located in one United States territory and 15 foreign countries; IHOP restaurants are located in two United States territories and seven foreign countries. With over 3,600 franchised and company-operated restaurants combined, we believe we are one of the largest full-service restaurant companies in the world.

Key Performance Indicators

In evaluating and assessing the performance of our business, we consider our key
performance indicators to be: (i) the percentage change in domestic system-wide
same-restaurant sales; (ii) net franchise restaurant development; (iii)
consolidated cash from operations; and (iv) consolidated free cash flow. An
overview of these metrics for the three months ended March 31, 2013 is as
follows:
                                                                Applebee's     IHOP
Percentage change in domestic system-wide same-restaurant sales   (1.3)%      (0.5)%
Net franchise restaurant development(1)                            (3)          8

(1) Franchise and area license openings, net of closings We consider consolidated cash from operations and consolidated free cash flow (cash provided by operating activities, plus receipts from notes, equipment contracts and other long-term receivables, less dividends paid and additions to property and equipment) to be key indicators of consolidated performance. Consolidated cash from operations and consolidated free cash flow for the three months ended March 31, 2013 were $71.2 million and $59.0 million, respectively. Additional information on each of our key performance indicators is presented under the captions "Restaurant Data," "Restaurant Development Activity," and "Liquidity and Capital Resources" that follow.


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Capital Allocation Strategy

On February 26, 2013, our Board of Directors approved a capital allocation strategy that incorporates the return of a significant portion of our cash flow to our stockholders. The Board of Directors approved the payment of a first quarter cash dividend of $0.75 per share of our common stock, paid at the close of business on March 29, 2013 to the stockholders of record as of the close of business on March 15, 2013. The Board of Directors also approved a stock repurchase authorization of up to $100 million of our common stock, replacing the previously announced $45 million authorization, pursuant to which $21.2 million of common stock had been repurchased. As of March 31,2013 we may repurchase an additional $100 million of common stock under the new authorization.

Restaurant Data

The following table sets forth, for the three months ended March 31, 2013 and 2012, the number of effective restaurants in the Applebee's and IHOP systems and information regarding the percentage change in sales at those restaurants compared to the same periods in the prior year. "Effective restaurants" are the number of restaurants in a given period, adjusted to account for restaurants open for only a portion of the period. Information is presented for all effective restaurants in the Applebee's and IHOP systems, which includes restaurants owned by the Company, as well as those owned by franchisees and area licensees. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. However, we believe that presentation of this information is useful in analyzing our revenues because franchisees and area licensees pay us royalties and advertising fees that are generally based on a percentage of their sales, and, where applicable, rental payments under leases that are usually based on a percentage of their sales. Management also uses this information to make decisions about future plans for the development of additional restaurants as well as evaluation of current operations.

                                   -                     Three Months Ended March 31,
                                             2013            2012           2013            2012
                                                  Applebee's                        IHOP
                                                                 (unaudited)
Restaurant Data
Effective restaurants(a)
Franchise                                     2,006           1,855          1,408           1,374
Area license                                      -               -            167             164
Company                                          23             163             12              13
Total                                         2,029           2,018          1,587           1,551

System-wide(b)
Sales percentage change(c)                     (0.4 )%          1.7 %          2.4  %          2.9  %
Domestic same-restaurant sales
percentage change(d)                           (1.3 )%          1.2 %         (0.5 )%         (0.5 )%

Franchise(b)(e)
Sales percentage change(c)                      7.2  %          7.2 %          2.3  %          2.8  %
Domestic same-restaurant sales
percentage change(d)                           (1.2 )%          1.0 %         (0.5 )%         (0.5 )%
Average weekly domestic unit sales (in
thousands)                               $     49.3      $     50.1     $     34.9      $     35.0

Area License (b)
Sales percentage change(c)                        -               -            4.1  %          3.4  %


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(a) "Effective restaurants" are the number of restaurants in a given fiscal period adjusted to account for restaurants open for only a portion of the period. Information is presented for all effective restaurants in the Applebee's and IHOP systems, which includes restaurants owned by the Company as well as those owned by franchisees and area licensees.

(b) "System-wide" sales are retail sales at Applebee's restaurants operated by franchisees and IHOP restaurants operated by franchisees and area licensees, as reported to the Company, in addition to retail sales at company-operated restaurants. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. Unaudited reported sales for Applebee's domestic franchise restaurants, IHOP franchise restaurants and IHOP area license restaurants for the three months ended March 31, 2013 and 2012 were as follows:

                                         Three Months Ended
                                             March 31,
                                         2013          2012
                                           (In millions)
Reported sales (unaudited)
Applebee's franchise restaurant sales $  1,191.5    $ 1,111.5
IHOP franchise restaurant sales       $    639.3    $   624.9
IHOP area license restaurant sales    $     64.9    $    62.3

(c) "Sales percentage change" reflects, for each category of restaurants, the percentage change in sales in any given fiscal period compared to the prior fiscal period for all restaurants in that category.

(d) "Domestic same-restaurant sales percentage change" reflects the percentage change in sales, in any given fiscal period, compared to the same weeks in the prior year for domestic restaurants that have been operated throughout both fiscal periods that are being compared and have been open for at least 18 months. Because of new unit openings and restaurant closures, the domestic restaurants open throughout both fiscal periods being compared may be different from period to period. Same-restaurant sales percentage change does not include data on IHOP area license restaurants located in Florida.

(e) The sales percentage change for the three months ended March 31, 2013 and 2012 for Applebee's franchise restaurants was impacted by the refranchising of 154 company-operated restaurants during 2012.


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Restaurant Development Activity

The following table summarizes Applebee's restaurant development and franchising
activity:

                                                  Three Months Ended
                                                       March 31,
                                                   2013         2012
                                                      (unaudited)
Applebee's Restaurant Development Activity
Beginning of period                               2,034         2,019
New openings:
Franchise                                             2             6
Total new openings                                    2             6
Closings:
Franchise                                            (5 )          (4 )
Total closings                                       (5 )          (4 )
End of period                                     2,031         2,021
Summary - end of period
Franchise                                         2,008         1,861
Company                                              23           160
Total                                             2,031         2,021
Restaurant Franchising Activity
Domestic franchise openings                           2             1
International franchise openings                      -             5
Refranchised                                          -            17
Total restaurants franchised                          2            23
Closings:
Domestic franchise                                   (3 )          (2 )
International franchise                              (2 )          (2 )
Total franchise closings                             (5 )          (4 )
Net franchise restaurant (reductions) additions      (3 )          19

In 2013, we expect Applebee's franchisees to open a total of 40 to 50 new restaurants, approximately half of which are expected to be opened domestically. We currently do not plan to open any Applebee's company-operated restaurants. The actual number of openings may differ from both our expectations and development commitments due to various factors, including economic conditions, franchisee access to capital, and the impact of currency fluctuations on our international franchisees. The timing of new restaurant openings also may be affected by various factors including weather-related and other construction delays and difficulties in obtaining regulatory approvals.


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The following table summarizes IHOP restaurant development and franchising activity:

                                       Three Months Ended
                                            March 31,
                                        2013         2012
                                           (unaudited)
IHOP Restaurant Development Activity
Beginning of period                    1,581         1,550
New openings:
Franchise                                 10            10
Area license                               2             -
Total new openings                        12            10
Closings:
Franchise                                 (4 )          (5 )
Area license                               -            (1 )
Total closings                            (4 )          (6 )
End of period                          1,589         1,554
Summary - end of period
Franchise                              1,410         1,377
Area license                             167           165
Company                                   12            12
Total                                  1,589         1,554
Restaurant Franchising Activity
Domestic franchise openings                8             9
International franchise openings           2             1
Area license openings                      2             -
Refranchised                               -             3
Total restaurants franchised              12            13
Closings:
Domestic franchise                        (4 )          (5 )
Area license                               -            (1 )
Total franchise closings                  (4 )          (6 )
Reacquired by the Company                  -             -
Net franchise restaurant additions         8             7

In 2013, we expect IHOP franchisees to open a total of 50 to 60 new restaurants, primarily in the domestic market. The actual number of openings in any period may differ from both our expectations and the number of signed commitments. Historically, the actual number of restaurants developed in a particular year has been less than the total number committed to be developed due to various factors including weather-related delays, other construction delays, difficulties in obtaining timely regulatory approvals, franchisee noncompliance with development agreements and various economic factors. We currently do not plan to open any new IHOP company-operated restaurants.


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Significant Known Events, Trends or Uncertainties Impacting or Expected to
Impact Comparisons of Reported or Future Results

Sales Trends                       Domestic System-wide Same-restaurant Sales
                                               Increase (Decrease)
                        2011                                         2012                     2013
               Q1        Q2        Q3        Q4        Q1        Q2        Q3        Q4        Q1
Applebee's
Quarter       3.9  %    3.1  %   (0.3 )%    1.0  %    1.2  %    0.7  %    2.0  %    0.9  %   (1.3 )%
YTD           3.9  %    3.5  %    2.3  %    2.0  %    1.2  %    1.0  %    1.3  %    1.2  %   (1.3 )%


IHOP
Quarter (2.7 )% (2.9 )% (1.5 )% (1.0 )% (0.5 )% (1.4 )% (2.0 )% (2.6 )% (0.5 )% YTD (2.7 )% (2.8 )% (2.4 )% (2.0 )% (0.5 )% (0.9 )% (1.3 )% (1.6 )% (0.5 )%

Applebee's domestic system-wide same-restaurant sales decreased 1.3% for the three months ended March 31, 2013, the first decline in the past six quarters. IHOP's domestic system-wide same-restaurant sales decreased 0.5% for the three months ended March 31, 2013; this represented the smallest decrease for IHOP over the past four quarters. The decreases for both brands resulted from a decline in guest traffic, partially offset by an increase in average guest check.

The restaurant industry as a whole endured a difficult economic environment during the first quarter of 2013. Consumers' discretionary income was adversely impacted by several factors, including the expiration of the 2% payroll tax cut that had been in place in 2011 and 2012, rising fuel prices and a mandated delay in the processing of federal tax returns. While both brands did experience declines in same-restaurant sales for the first quarter of 2013, both brands outpaced the performance of their respective segments. Based on published industry data, the 1.3% decline in same-restaurant sales for Applebee's was approximately 1.6% better than the casual dining segment as a whole, while the 0.5% decline in same-restaurant sales for IHOP was approximately 2.5% better than the overall performance of the family dining segment. With respect to both brands, same-restaurant sales performance for the first three months of 2013 is not necessarily indicative of results expected for the full year.

We are working to restore same-restaurant sales and traffic momentum by differentiating our brands through innovative and creative advertising, by offering a value proposition that resonates with our guests, and by providing a broad array of craveable menu items to entice repeat visits for dining experiences unique to Applebee's and IHOP. Continually refining our menu is an important part of the dining experience for our guests. In January 2013 we introduced the first of three new IHOP menus planned for this year. The second launch is scheduled for June and the third is slated for late 2013. Our menu strategy has three objectives: (i) simplify the ordering process with a new menu layout that includes improved photography highlighting our offerings; (ii) reduce the overall number of menu items over time to lessen complexity; and
(iii) introduce new and exciting menu offerings and categories. In the first quarter, IHOP launched our new line of breakfast sandwiches, Griddle Melts, with an innovative national TV spot filmed in Times Square, featuring testimonials from real consumers about how much they love our new sandwiches.

Applebee's refreshed their popular "2 for $20" value offering in February with the inclusion of two new dishes inspired by New Orleans-style cuisine. Applebee's also continues to build on its leadership in offering low-calorie choices in the casual dining category by refreshing the "Unbelievably Great Tasting and Under 550 Calories" menu with the introduction of Zesty Roma Chicken & Shrimp and Lemon Parmesan Shrimp as part of our "Taste It, Believe It" campaign.

Franchisee Matters

From time to time, our franchisees may experience financial difficulties, including bankruptcy.

In February 2013, an IHOP franchisee which owns and operates 19 restaurants located in the states of Illinois, Wisconsin and Missouri filed for bankruptcy protection. This franchisee currently is operating all of its restaurants in the normal course of business and is current on all financial obligations to us.

In April 2013, an Applebee's franchisee which owns and operates 33 restaurants located in the state of Illinois also filed for bankruptcy protection. In connection with the bankruptcy filing, this franchisee expects to close eight restaurants. This franchisee currently is operating its remaining restaurants in the normal course of business and is current on all financial obligations to us.

Based on currently available information, we cannot determine whether either of these bankruptcy proceedings will have a material adverse impact on our results of operations for the 2013 fiscal year or, if such material adverse impact were to occur, the magnitude of the impact.


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Comparison of the Three Months ended March 31, 2013 and 2012

Results of Operations

Key components of changes in our financial results for the three months ended March 31, 2013 compared to the same period of 2012 are summarized below and discussed in the sections that follow:

• Revenue decreased $82.4 million, primarily due to the refranchising of Applebee's company-operated restaurants, partially offset by higher franchise royalty revenues resulting from the increase in the number of Applebee's and IHOP franchise restaurants;

• Segment profit decreased $14.2 million, comprised as follows:

                                    Three Months Ended           Favorable
                                         March 31,             (Unfavorable)
                                      2013           2012        Variance
                                                (In millions)
Franchise operations            $    83.7          $  80.8    $         2.9
Company restaurant operations         0.2             16.7            (16.5 )
Rental operations                     6.7              7.5             (0.8 )
Financing operations                  3.8              3.6              0.2
Total                           $    94.4          $ 108.6    $       (14.2 )

The decline in segment profit was primarily due to the refranchising of Applebee's company-operated restaurants and a 1.3% decrease in Applebee's domestic same-restaurant sales, partially offset by an increase in the number of Applebee's and IHOP franchise restaurants;

• We recognized a gain on disposition of assets of $0.3 million for the three months ended March 31, 2013, compared with a gain on disposition of assets of $16.7 million in the first quarter of 2012. With the completion of our strategy to refranchise the significant majority of Applebee's company-operated restaurants in October 2012, we do not expect gains or losses on dispositions of company-operated restaurants will be significant for the foreseeable future;

• General and administrative ("G&A") expenses decreased $5.6 million, primarily due to lower compensation costs resulting from the staff restructuring initiatives announced in the third quarter of 2012 and from the refranchising of Applebee's company-operated restaurants; and

• Interest expense decreased $4.9 million primarily due to our reduction of debt balances over the past 12 months, in addition to a lower interest rate on our Term Loan.


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Franchise Operations
                                                Three Months Ended           Favorable
                                                    March 31,              (Unfavorable)
                                               2013            2012           Variance        % Change (1)
                                                            (In millions)
Franchise Revenues
Applebee's                                 $     50.7       $    47.5     $        3.2             6.7  %
IHOP                                             41.2            41.2                -               -  %
IHOP advertising                                 20.0            19.7              0.3             1.4  %
Total franchise revenues                        111.9           108.4              3.5             3.2  %
Franchise Expenses
Applebee's                                        1.5             0.8             (0.7 )         (89.3 )%
IHOP                                              6.7             7.1              0.4             5.8  %
IHOP advertising                                 20.0            19.7             (0.3 )          (1.4 )%
Total franchise expenses                         28.2            27.6             (0.6 )          (2.0 )%
Franchise Segment Profit
Applebee's                                       49.2            46.8              2.5             5.3  %
IHOP                                             34.5            34.0              0.4             1.2  %
Total franchise segment profit             $     83.7       $    80.8     $        2.9             3.6  %
Segment profit as % of revenue (1)               74.8 %          74.5 %


 _____________________________________________________


(1) Percentages calculated on actual amounts, not rounded amounts presented above

The $3.2 million increase in Applebee's franchise revenue was primarily attributable to increased royalty revenue resulting from the refranchising of 154 company-operated restaurants in 2012 (17 in the first quarter, 98 in the third quarter and 39 in the fourth quarter), partially offset by a 1.2% decrease in domestic same-restaurant sales. IHOP franchise revenue (other than advertising) was unchanged from the prior year as higher royalty revenues resulting from a 2.5% increase in effective franchise units were offset by a decrease in sales of pancake and waffle dry mix.

IHOP's franchise expenses are substantially higher than Applebee's due to advertising expenses. Franchise fees designated for IHOP's national advertising fund and local marketing and advertising cooperatives are recognized as revenue and expense of franchise operations; however, Applebee's national advertising fund activity constitutes an agency transaction and therefore is not recognized as franchise revenue and expense. The increase in IHOP advertising revenue and expense is primarily due to the increase in effective franchise restaurants partially offset by the decrease in domestic franchise same-restaurant sales.

The increase in franchise segment profit is primarily due to an increase in effective franchise restaurants due to the refranchising of Applebee's company-operated restaurants.

Company Restaurant Operations
                                               Three Months Ended           Favorable
                                                    March 31,             (Unfavorable)
                                               2013           2012          Variance        % Change (1)
. . .
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