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DIN > SEC Filings for DIN > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for DINEEQUITY, INC

Form 10-Q for DINEEQUITY, INC


30-Jul-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. Over 99% of our restaurants are franchised. We also have 34 company owned and operated restaurants primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models.

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 16 foreign countries; IHOP restaurants are located in two United States territories and seven foreign countries. With over 3,600 restaurants combined, we believe we are one of the largest full-service restaurant companies in the world. The June 24, 2013 issue of Nation's Restaurant News recently reported that IHOP and Applebee's were the largest restaurants in their respective categories in terms of United States system-wide sales during 2012. This marks the sixth consecutive year each brand has achieved the number one ranking.

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 free cash flow to our stockholders. The Board of Directors also approved a stock repurchase authorization of up to $100 million of our common stock. Pursuant to that strategy, during the six months ended June 30, 2013 we have declared and paid two quarterly cash dividends of $0.75 per share of our common stock totaling $28.9 million. We also have repurchased approximately 200,000 shares of our common stock totaling $14.5 million. As of June 30, 2013 we may repurchase up to an additional $85.5 million of common stock under the current authorization.


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Key Performance Indicators

In evaluating the performance of each concept, we consider the key performance indicators to be net franchise restaurant development and the percentage change in domestic system-wide same-restaurant sales. Since we are a 99% franchised company, expanding the number of franchise restaurants is an important driver of revenue growth. We currently do not plan to open any new Applebee's or IHOP company-operated restaurants. Revenue from our rental and financing operations, legacies from the IHOP business model we operated under prior to 2003, is subject to progressive decline over time as balances are repaid. Growth in the both the number of franchise restaurants and sales at those restaurants will drive franchise revenues in the form of higher royalty revenues, additional franchise fees and, in the case of IHOP restaurants, sales of proprietary pancake and waffle dry mix.

An overview of these performance indicators for the three and six months ended June 30, 2013 is as follows:

                                              Three Months Ended         Six Months Ended
                                                June 30, 2013             June 30, 2013
                                            Applebee's       IHOP     Applebee's      IHOP
Percentage change in domestic system-wide
same-restaurant sales                          1.3%          1.9%        0.0%         0.7%
Net franchise restaurant development(1)        (19)           4          (22)          12

(1) Franchise and area license openings, net of closings and refranchisings For the three months ended June 30, 2013, both brands achieved increases in same-restaurant sales that were sequential improvements from the first quarter of 2013. IHOP's increase of 1.9% marked the first positive quarter since the fourth quarter of 2010. Applebee's increase of 1.3% was the eighth positive quarter of the prior 10 quarters. Results for the six months ended June 30, 2013 for both brands were tempered by the difficult economic environment encountered during the first quarter of 2013, as consumers were adversely impacted by several factors, including the expiration of the 2% payroll tax holiday, rising fuel prices and a delay in federal tax returns. Applebee's net restaurant development was adversely impacted by restaurant closures during the second quarter of 2013. In April 2013, an Applebee's franchisee that owned and operated 33 restaurants located in Illinois filed for bankruptcy protection. As a result of those proceedings, 15 of the restaurants were sold in June 2013 to an affiliate of an existing franchisee and operated without interruption during the transition of ownership. The remaining 18 restaurants were closed in June 2013. We have entered into a development agreement with the new franchisee to open additional restaurants in Illinois in the future. In 2013, we expect Applebee's franchisees to open a total of 40 to 50 new restaurants, the majority of which are expected to be opened domestically. In 2013, we expect IHOP franchisees to open a total of 50 to 60 new restaurants, primarily in the U.S. market. As of June 30, 2013, Applebee's and IHOP franchisees have opened 6 and 22 new restaurants, respectively. Historically, the majority of restaurant openings take place in the second half of the year. Over the past five years, nearly two-thirds of Applebee's new openings and approximately 60% of IHOP's new openings took place in the last six months of the year. For both brands, the fourth quarter has been the most active in terms of new restaurant openings. The actual number of openings may differ from both our expectations and development 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 economic conditions and franchisee noncompliance with development agreements. The timing of new restaurant openings also may be affected by various factors including weather-related and other construction delays, difficulties in obtaining timely regulatory approvals and the impact of currency fluctuations on our international franchisees. In evaluating the performance of the consolidated enterprise, we consider the key performance indicators to be consolidated cash from operations and consolidated free cash flow (cash from operations, plus receipts from notes, equipment contracts and other long-term receivables, less consolidated capital expenditures, principal payments on capital leases and financing obligations and the mandatory annual repayment of 1% of the principal balance of our Term Loans). Consolidated cash from operations and consolidated free cash flow for the six months ended June 30, 2013 were $55.4 million and $52.1 million, respectively. Additional detail on each of our key performance indicators is presented under the captions "Restaurant Development Activity," "Restaurant Data," and "Liquidity and Capital Resources" that follow.


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Restaurant Development Activity

The following table summarizes Applebee's restaurant development and franchising
activity during the three and six months ended June 30, 2013 and 2012:

                                                  Three Months Ended         Six Months Ended
                                                       June 30,                  June 30,
                                                   2013         2012         2013        2012
                                                                  (Unaudited)
Applebee's Restaurant Development Activity
Beginning of period                               2,031         2,021       2,034        2,019
New openings:
Franchise                                             4             3           6            9
Total new openings                                    4             3           6            9
Closings:
Franchise                                           (23 )          (6 )       (28 )        (10 )
Total closings                                      (23 )          (6 )       (28 )        (10 )
End of period                                     2,012         2,018       2,012        2,018
Summary - end of period
Franchise                                         1,989         1,858       1,989        1,858
Company                                              23           160          23          160
Total                                             2,012         2,018       2,012        2,018
Restaurant Franchising Activity
Domestic franchise openings                           3             2           5            3
International franchise openings                      1             1           1            6
Refranchised                                          -             -           -           17
Total restaurants franchised                          4             3           6           26
Closings:
Domestic franchise                                  (22 )          (2 )       (25 )         (4 )
International franchise                              (1 )          (4 )        (3 )         (6 )
Total franchise closings                            (23 )          (6 )       (28 )        (10 )
Net franchise restaurant (reductions) additions     (19 )          (3 )       (22 )         16


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The following table summarizes IHOP restaurant development and franchising activity during the three and six months ended June 30, 2013 and 2012:

                                                  Three Months Ended         Six Months Ended
                                                       June 30,                  June 30,
                                                   2013         2012         2013        2012
                                                                  (Unaudited)
IHOP Restaurant Development Activity
Beginning of period                               1,589         1,554       1,581        1,550
New openings:
Franchise                                             8             5          18           15
Area license                                          2             1           4            1
Total new openings                                   10             6          22           16
Closings:
Franchise                                            (5 )          (2 )        (9 )         (7 )
Area license                                         (1 )          (1 )        (1 )         (2 )
Total closings                                       (6 )          (3 )       (10 )         (9 )
End of period                                     1,593         1,557       1,593        1,557
Summary - end of period
Franchise                                         1,414         1,375       1,414        1,375
Area license                                        168           165         168          165
Company                                              11            17          11           17
Total                                             1,593         1,557       1,593        1,557
Restaurant Franchising Activity
Domestic franchise openings                           7             5          15           14
International franchise openings                      1             -           3            1
Area license openings                                 2             1           4            1
Refranchised                                          1             1           1            4
Total restaurants franchised                         11             7          23           20
Closings:
Domestic franchise                                   (5 )          (2 )        (9 )         (7 )
Area license                                         (1 )          (1 )        (1 )         (2 )
Total franchise closings                             (6 )          (3 )       (10 )         (9 )
Reacquired by the Company                             -            (6 )         -           (6 )
Net franchise restaurant additions (reductions)       5            (2 )        13            5


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Restaurant Data

The following table sets forth, for the three and six months ended June 30, 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. 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 may be partially 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 June 30,           Six Months Ended June 30,
                                               2013                 2012              2013             2012
                                                                       (Unaudited)
Applebee's Restaurant Data
Effective Restaurants(a)
Franchise                                        2,003                 1,859           2,005             1,857
Company                                             23                   160              23               161
Total                                            2,026                 2,019           2,028             2,018

System-wide(b)
Sales percentage change(c)                         0.6 %                 1.2 %           0.7 %             1.4 %
Domestic same-restaurant sales
percentage change(d)                               1.3 %                 0.7 %           0.0 %             1.0 %

Franchise(b)(e)
Sales percentage change(c)                         8.7 %                 5.5 %           8.9 %             6.4 %
Domestic same-restaurant sales
percentage change(d)                               1.3 %                 0.5 %           0.0 %             0.8 %
Average weekly domestic unit sales (in
thousands)                               $        47.4         $        46.9     $      48.3       $      48.5



                                      -       Three Months Ended June 30,          Six Months Ended June 30,
                                                2013               2012              2013              2012
                                                                        (Unaudited)
IHOP Restaurant Data
Effective Restaurants(a)
Franchise                                        1,410             1,377              1,409             1,375
Area license                                       167               164                167               164
Company                                             12                14                 12                13
Total                                            1,589             1,555              1,588             1,552

System-wide(b)
Sales percentage change(c)                         4.3 %             1.9  %             3.3 %             2.4  %
Domestic same-restaurant sales
percentage change(d)                               1.9 %            (1.4 )%             0.7 %            (0.9 )%

Franchise(b)
Sales percentage change(c)                         4.3 %             1.7  %             3.3 %             2.2  %
Domestic same-restaurant sales
percentage change(d)                               1.9 %            (1.3 )%             0.7 %            (0.8 )%
Average weekly domestic unit sales (in
thousands)                                 $      34.4       $      33.8        $      34.7       $      34.4

Area License (b)
Sales percentage change(c)                         4.8 %             3.2  %             4.5 %             3.3  %


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(a) Effective Restaurants are the weighted average number of restaurants open 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 and six months ended June 30, 2013 and 2012 were as follows:

                                         Three Months Ended         Six Months Ended
                                              June 30,                  June 30,
                                         2013          2012         2013         2012
                                                        (In millions)
Reported sales (unaudited)
Applebee's franchise restaurant sales $  1,144.2    $ 1,042.5    $ 2,335.7    $ 2,154.0
IHOP franchise restaurant sales       $    630.9    $   604.8    $ 1,270.2    $ 1,229.8
IHOP area license restaurant sales    $     61.3    $    58.5    $   126.2    $   120.8

(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.

(e) The sales percentage change for the three and six months ended June 30, 2013 and 2012 for Applebee's franchise restaurants was impacted by the refranchising of 154 company-operated restaurants during 2012.


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

Same-restaurant Sales Trends

[[Image Removed]]

Applebee's domestic system-wide same-restaurant sales increased 1.3% for the three months ended June 30, 2013 from the same period in 2012, marking the eighth positive quarter of the past ten quarters. The increase resulted from a higher average guest check, partially offset by a decline in guest traffic. For the first six months of 2013, Applebee's domestic system-wide same-restaurant sales were flat compared to 2012 as a higher average guest check was offset by a decline in guest traffic. Same-restaurant sales performance for the first six months of 2013 is not necessarily indicative of results expected for the full year.

[[Image Removed]] IHOP's domestic system-wide same-restaurant sales increased 1.9% for the three months ended June 30, 2013 from the same period in 2012, IHOP's first quarterly increase in same-restaurant sales since the fourth quarter of 2010. The increase resulted from a higher average guest check and an increase in guest traffic. For the first six months of 2013, IHOP's domestic system-wide same-restaurant sales increased 0.7% compared to 2012 as a higher average guest check was partially offset by a decline in guest traffic. Same-restaurant sales performance for the first six months of 2013 is not necessarily indicative of results expected for the full year.


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Revenues from the restaurant industry increased in the second quarter of 2013 compared to the first quarter of 2013,which were adversely impacted by the difficult economic environment encountered during the first three months of 2013. The consumer confidence index has risen steadily during 2013 from February to June, although recent speculation as to the timing of changes in Federal monetary policy and seasonally volatile gas prices could impact that trend.

We work to drive same-restaurant sales and traffic by differentiating our brands through innovative and creative advertising; attentive service; 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 improving the dining experience for our guests. In both January and June of 2013 we introduced new IHOP menus, with a third launch slated for late 2013. Our menu strategy has three objectives: (i) simplify the ordering process with a new menu layout; (ii) reduce the overall number of menu items over time to lessen complexity; and (iii) introduce new and exciting menu offerings and categories. Additionally, we continued to optimize our advertising and media spend to increase both reach and frequency with the goal of more effectively connecting with our target customers.

Providing our guests a compelling value proposition is an integral part of Applebee's menu strategy. In May, we launched "Fresh Flavors of Summer" starting at $9.99 and the new Lunch Combo starting at $6.99. In addition, the recent introduction of "Take Two," starting at $10.99, offers guests the opportunity to sample any two items from the new Fresh Flavors of Summer selections. The Applebee's remodel program also has been a key component of our strategy to drive same-restaurant sales and traffic and has revitalized and helped to differentiate the brand. During the second quarter of 2013, franchisees remodeled 100 restaurants; over 60% of the domestic Applebee's system has been remodeled since the program was initiated in the second half of 2010.

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. As a result of an order issued by the bankruptcy court in July, 2013, it is probable that two of the 19 restaurants will be returned to the Company. Accordingly, a non-cash charge of $0.5 million was recorded in the Consolidated Statement of Comprehensive Income for the six months ended June 30, 2013, against deferred rental revenue associated with the leases for those two restaurants. This franchisee currently is operating the remaining 17 restaurants and continues to make payments to us pursuant to our franchise agreement. However, depending on the resolution of the bankruptcy proceedings with respect to the remaining 17 restaurants, the Company may incur additional non-cash charges of up to $5.4 million for deferred rental revenue and equipment leases associated with these restaurants.

In an unrelated matter, in April 2013, an Applebee's franchisee which owned and operated 33 restaurants located in Illinois filed for bankruptcy protection. Pursuant to the bidding procedures approved by the bankruptcy court, 15 of the restaurants were sold in June 2013 to an affiliate of an existing franchisee and operated without interruption during the transition of ownership. The remaining 18 restaurants were closed in June 2013. The Company believes it is entitled to termination payments and other fees in connection with the closure of these restaurants. The amount of these payments is subject to the bankruptcy proceeding and cannot be determined at this time. We do not expect the outcome of the bankruptcy proceeding to have a material adverse impact on our results of operations for the 2013 fiscal year. We have entered into a development agreement with the franchisee that acquired the 15 restaurants to open additional restaurants in Illinois in the future.


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