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DIN > SEC Filings for DIN > Form 10-Q on 29-Oct-2013All Recent SEC Filings

Show all filings for DINEEQUITY, INC

Form 10-Q for DINEEQUITY, INC


29-Oct-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 36 company-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 17 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 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 in that measure.

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 an authorization to repurchase up to $100 million of our common stock. Pursuant to that strategy, during the nine months ended September 30, 2013 we declared and paid three quarterly cash dividends of $0.75 per share of our common stock totaling $43.2 million. We also repurchased 351,704 shares of our common stock at a total cost of $24.7 million during this period. As of September 30, 2013 we may repurchase up to an additional $75.3 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 interest-earning balances are repaid. Growth in 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 nine months ended September 30, 2013 is as follows:

                                                Three Months Ended         Nine Months Ended
                                                September 30, 2013         September 30, 2013
                                              Applebee's       IHOP      Applebee's       IHOP
Percentage change in domestic system-wide
same-restaurant sales                           (0.4)%         3.6%        (0.1)%         1.7%
Net franchise restaurant development(1)          (2)            9           (24)           21

(1) Franchise and area license openings, net of closings and refranchisings IHOP's increase of 3.6% in domestic system-wide restaurant sales for three months ended September 30, 2013 was the second consecutive quarterly increase in domestic system-wide restaurant sales and the largest increase since the first quarter of 2008. The increase resulted from a higher average customer check partially offset by a decrease in customer traffic. Applebee's domestic system-wide restaurant sales for three months ended September 30, 2013 decreased 0.4% as a decrease in customer traffic was partially offset by an increase in average customer check. IHOP's increase of 1.7% in domestic system-wide restaurant sales for the nine months ended September 30, 2013 reflects sequential improvement in each of the first three quarters of 2013, with a decrease of 0.5% in the first quarter of 2013 followed by increases of 1.9% and 3.6% in the second and third quarters, respectively. Applebee's slight decrease of 0.1% in domestic system-wide restaurant sales for the nine months ended September 30, 2013 reflects a decrease of 1.3% in the first quarter followed by an increase of 1.3% in the second quarter and the decrease of 0.4% in the third quarter. Applebee's net restaurant development for the nine months ended September 30, 2013 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 and we received termination fees of $3.8 million related to the closure of the 18 restaurants during the third quarter of 2013. We have entered into a development agreement with the new franchisee to open additional restaurants in Illinois in the future. As of September 30, 2013, Applebee's and IHOP franchisees have opened 10 and 35 new restaurants, respectively. In 2013, we expect Applebee's franchisees to open a total of 25 to 30 new restaurants, the majority of which are expected to be opened domestically. We have reduced our previous estimate of 40 to 50 new restaurant openings primarily because for the past few years, franchisees have allocated a significant amount of capital, both human and financial, to the remodel/revitalization program. We underestimated the time it would take to rebuild the development pipeline. In addition, several of the franchisee-to-franchisee transfers that were completed in 2013 had development obligations that were extended as part of the transactions. In 2013, we expect IHOP franchisees to open a total of 50 to 60 new restaurants, the majority of which are expected to be opened domestically. Over the past five years, the fourth quarter of each year has been the most active in terms of new restaurant openings for both brands. 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.


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Consolidated cash flows from operating activities and consolidated free cash flow for the nine months ended September 30, 2013 were as follows:

                                                       Nine Months Ended
                                                         September 30,
                                                        2013           2012
                                                         (In millions)
Consolidated cash flows from operating activities $     102.8         $ 68.1
Consolidated free cash flow                       $      98.6         $ 51.1

In evaluating the performance of the consolidated enterprise, we consider the key performance indicators to be consolidated cash flows from operating activities 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 nine months ended September 30, 2013 were $102.8 million and $98.6 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.

Restaurant Development Activity

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

                                                  Three Months Ended         Nine Months Ended
                                                     September 30,             September 30,
                                                   2013         2012         2013         2012
                                                                   (Unaudited)
Applebee's Restaurant Development Activity
Beginning of period                               2,012         2,018       2,034         2,019
New openings:
Franchise                                             4             5          10            14
Total new openings                                    4             5          10            14
Closings:
Franchise                                            (6 )          (7 )       (34 )         (17 )
Total closings                                       (6 )          (7 )       (34 )         (17 )
End of period                                     2,010         2,016       2,010         2,016
Summary - end of period
Franchise                                         1,987         1,954       1,987         1,954
Company                                              23            62          23            62
Total                                             2,010         2,016       2,010         2,016
Restaurant Franchising Activity
Domestic franchise openings                           1             4           6             7
International franchise openings                      3             1           4             7
Refranchised                                          -            98           -           115
Total restaurants franchised                          4           103          10           129
Closings:
Domestic franchise                                   (6 )          (2 )       (31 )          (6 )
International franchise                               -            (5 )        (3 )         (11 )
Total franchise closings                             (6 )          (7 )       (34 )         (17 )
Net franchise restaurant (reductions) additions      (2 )          96         (24 )         112


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

                                       Three Months Ended        Nine Months Ended
                                          September 30,            September 30,
                                        2013         2012         2013        2012
                                                       (Unaudited)
IHOP Restaurant Development Activity
Beginning of period                    1,593         1,557       1,581       1,550
New openings:
Franchise                                 13            12          31          27
Area license                               -             -           4           1
Total new openings                        13            12          35          28
Closings:
Franchise                                 (4 )          (4 )       (13 )       (11 )
Area license                               -             -          (1 )        (2 )
Total closings                            (4 )          (4 )       (14 )       (13 )
End of period                          1,602         1,565       1,602       1,565
Summary - end of period
Franchise                              1,421         1,383       1,421       1,383
Area license                             168           165         168         165
Company                                   13            17          13          17
Total                                  1,602         1,565       1,602       1,565
Restaurant Franchising Activity
Domestic franchise openings               10            10          25          24
International franchise openings           3             2           6           3
Area license openings                      -             -           4           1
Refranchised                               -             -           1           4
Total restaurants franchised              13            12          36          32
Closings:
Domestic franchise                        (4 )          (4 )       (13 )       (11 )
Area license                               -             -          (1 )        (2 )
Total franchise closings                  (4 )          (4 )       (14 )       (13 )
Reacquired by the Company                 (2 )           -          (2 )        (6 )
Net franchise restaurant additions         7             8          20          13


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Restaurant Data

The following table sets forth, for the three and nine months ended September 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 partially may be 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               Nine Months Ended
                                   -             September 30,                    September 30,
                                              2013             2012            2013             2012
                                                                   (Unaudited)
Applebee's Restaurant Data
Effective Restaurants(a)
Franchise                                      1,986            1,871           1,998            1,861
Company                                           23              144              23              156
Total                                          2,009            2,015           2,021            2,017

System-wide(b)
Sales percentage change(c)                       0.0  %           2.4 %           0.6  %           1.7 %
Domestic same-restaurant sales
percentage change(d)                            (0.4 )%           2.0 %          (0.1 )%           1.3 %

Franchise(b)(e)
Sales percentage change(c)                       6.2  %           8.4 %           7.7  %           7.0 %
Domestic same-restaurant sales
percentage change(d)                            (0.4 )%           2.2 %          (0.1 )%           1.2 %
Average weekly domestic unit sales (in
thousands)                               $      44.9       $     45.1     $      47.2       $     47.4



IHOP Restaurant Data
Effective Restaurants(a)
Franchise                                     1,413        1,377          1,410        1,375
Area license                                    168          165            167          165
Company                                          12           17             12           15
Total                                         1,593        1,559          1,589        1,555

System-wide(b)
Sales percentage change(c)                      6.1 %        0.9  %         4.2 %        1.9  %
Domestic same-restaurant sales
percentage change(d)                            3.6 %       (2.0 )%         1.7 %       (1.3 )%

Franchise(b)
Sales percentage change(c)                      6.2 %        0.4  %         4.3 %        1.6  %
Domestic same-restaurant sales
percentage change(d)                            3.6 %       (2.0 )%         1.7 %       (1.2 )%
Average weekly domestic unit sales (in
thousands)                                $    35.0     $   33.8      $    34.8     $   34.2

Area License (b)
Sales percentage change(c)                      7.9 %        4.0  %         5.6 %        3.5  %


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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 nine months ended September 30, 2013 and 2012 were as follows:

                                         Three Months Ended         Nine Months Ended
                                           September 30,              September 30,
                                         2013          2012         2013         2012
                                                        (In millions)
Reported sales (unaudited)
Applebee's franchise restaurant sales $  1,073.7    $ 1,011.4    $ 3,409.4    $ 3,165.4
IHOP franchise restaurant sales       $    642.6    $   604.8    $ 1,912.7    $ 1,834.6
IHOP area license restaurant sales    $     61.8    $    57.3    $   188.0    $   178.1

(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. Domestic same-restaurant sales percentage change does not include data on IHOP area license restaurants.

(e) The sales percentage change for the three and nine months ended September 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 decreased 0.4% for the three months ended September 30, 2013 from the same period in 2012. For the first nine months of 2013, Applebee's domestic system-wide same-restaurant sales decreased 0.1% from the same period in 2012. For both comparative periods, a decline in customer traffic was partially offset by an increase in average customer check. Same-restaurant sales performance for the first nine 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 3.6% for the three months ended September 30, 2013 from the same period in 2012, the second consecutive quarterly increase and the largest increase since the first quarter of 2008. For the first nine months of 2013, IHOP's domestic system-wide same-restaurant sales increased 1.7% compared to 2012. For both comparative periods, the improvement resulted from a higher average customer check substantially larger than a decrease in customer traffic. We believe the increase in average customer check was due in part to the new IHOP menu launched in June 2013 which influenced customers' purchasing patterns and resulted in a favorable shift in product mix. Additionally, we believe the average customer check had declined in 2012 because of strong consumer interest in promotional menu items, resulting in a lower base for comparison. Same-restaurant sales performance for the first nine months of 2013 is not necessarily indicative of results expected for the full year.


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Published measures of national consumer confidence declined in the third quarter of 2013, an indication that economic uncertainty continues to impact consumers' decisions with respect to discretionary spending in general as well as with respect to dining out. Revenues from the restaurant industry as a whole decreased in the third quarter of 2013 compared to the second quarter of 2013. However, the industry segments in which we operate moved in opposite directions. Revenues in the casual dining segment decreased during the third quarter of 2013 compared to the second quarter, while revenues from the family dining segment increased during the third quarter of 2013 compared to the second quarter. Both Applebee's and IHOP outperformed the averages of their respective categories based on domestic system-wide same-restaurant sales.

We work to drive consistent and sustainable same-restaurant sales and traffic and differentiate our brands by focusing on menu innovation, operational excellence, advertising and media, and our value proposition. The new IHOP menu launched in June 2013 had 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. Applebee's menu is continually updated through the offering of new culinary creations, such as "Honey Pepper Sirloin" and "Honey Pepper Chicken & Shrimp" as part of our signature "2 for $20" offering.

We continue to optimize our media strategy to increase both reach and frequency to break through the very competitive media landscape and more effectively connect with target customers of both IHOP and Applebee's. For example, in September 2013 we launched a joint venture with ESPN®, the worldwide leader in sports coverage, to debut "ESPN Fan Zone" at Applebee's restaurants across the country. The partnership creates a new environment for guests to enjoy their favorite teams and the wide selection on our menu. As part of the game-watching experience, guests also can choose items from a new "Game Time Menu." In addition to our focus on traditional media such as TV and radio, we continued our expansion into digital and social media, additional vehicles through which we connect with our customers.

The Applebee's remodel program also has been a key component of our strategy to drive same-restaurant sales and traffic and we believe has revitalized and helped to differentiate the brand. During the third quarter of 2013, franchisees remodeled over 80 restaurants; approximately two-thirds 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 and its affiliated entities which owned and operated 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, two of the 19 restaurants were returned to us in the third . . .

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