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DIN > SEC Filings for DIN > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for DINEEQUITY, INC

Form 10-Q for DINEEQUITY, INC


1-May-2014

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, 2013. 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 within 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 by us. Over 99% of our 3,638 restaurants are franchised. We have 33 company-operated restaurants primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models. In addition, from time to time we may also operate, on a temporary basis until refranchised, IHOP restaurants that we reacquire for a variety of reasons from IHOP franchisees. There were no such restaurants included as company-operated restaurants as of March 31, 2014.

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 14 foreign countries; IHOP restaurants are located in two United States territories and nine foreign countries. With over 3,600 restaurants combined, we believe we are one of the largest full-service restaurant companies in the world.

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 because 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 a 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.


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An overview of these key performance indicators for the three months ended March 31, 2014 is as follows:

                                                                  Three Months Ended
                                                                    March 31, 2014
                                                                Applebee's       IHOP
Percentage (decrease) increase in domestic system-wide
same-restaurant sales                                             (0.5)%         3.9%
Net franchise restaurant development(1)                             -             10


___________________________________
(1) Franchise and area license openings, net of closings

IHOP's increase of 3.9% in domestic system-wide restaurant sales for three months ended March 31, 2014 was the fourth consecutive quarterly increase in domestic system-wide restaurant sales. The increase resulted from a higher average customer check partially offset by a slight decrease in customer traffic. IHOP significantly outperformed the overall restaurant industry as well as the family dining segment in this metric for the three months ended March 31, 2014. Based on data from Black Box Intelligence, a restaurant sales reporting firm ("Black Box"), same-restaurant sales decreased for both the overall restaurant industry and the family dining segment during the first quarter of 2014. Applebee's domestic system-wide restaurant sales for three months ended March 31, 2014 decreased 0.5% as a decline in customer traffic was partially offset by an increase in average customer check. Applebee's performance was in line with that of the overall restaurant industry as well of as the casual dining segment, both of which decreased during the first quarter of 2014 based on data from Black Box. During the three months ended March 31, 2014, Applebee's opened eight new restaurants while IHOP franchisees and area licensees opened 14 new restaurants. Applebee's franchisees closed eight restaurants during that time period, resulting in no net franchise restaurant growth. The closures were unrelated as each restaurant was closed by a different Applebee's franchisee. In addition to the 14 IHOP franchise restaurant openings, three restaurants that had been temporarily operated by us were refranchised to new owners. IHOP franchisees closed seven restaurants, resulting in net growth of 10 franchise restaurants. Of the seven IHOP closures, two were closed by the same franchisee and the other five were closed by different franchisees. In 2014, we expect both IHOP and Applebee's franchisees to each open a total of between 40 to 50 new restaurants. The majority of openings for each brand are expected to be in domestic markets. 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 flows from operating activities and consolidated free cash flow (cash from operations, plus receipts from notes, equipment contracts and other long-term receivables, minus 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 flows from operating activities and consolidated free cash flow for the three months ended March 31, 2014 and 2013 were as follows:

                                                       Three Months Ended
                                                           March 31,
                                                         2014           2013
                                                         (In millions)
Consolidated cash flows from operating activities $     52.8           $ 71.2
Consolidated free cash flow                       $     50.3           $ 69.8

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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Capital Allocation Strategy

In February 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. In conjunction therewith, the Board of Directors approved an authorization to repurchase up to $100 million of our common stock. Pursuant to that strategy, during the three months ended March 31, 2014 we declared and paid a quarterly cash dividend of $0.75 per share of our common stock totaling $14.3 million. We also repurchased 178,528 shares of our common stock at a total cost of $15.0 million during this period. As of March 31, 2014 we may repurchase up to an additional $55.3 million of common stock under the current authorization.

Restaurant Development Activity

The following table summarizes Applebee's restaurant development activity during
the three months ended March 31, 2014 and 2013:
                                                      Three Months Ended
                                                           March 31,
                                                       2014         2013
                                                         (Unaudited)
Applebee's Restaurant Development Activity
Summary - beginning of period:
Franchise                                             1,988         2,011
Company restaurants                                      23            23
Total Applebee's restaurants, beginning of period     2,011         2,034
Franchise restaurants opened:
Domestic                                                  8             2
International                                             -             -
Total franchise restaurants opened                        8             2
Franchise restaurants closed:
Domestic                                                 (5 )          (3 )
International                                            (3 )          (2 )
Total franchise restaurants closed                       (8 )          (5 )
Net franchise restaurant additions (reductions)           -            (3 )
Summary - end of period:
Franchise                                             1,988         2,008
Company restaurants                                      23            23
Total Applebee's restaurants, end of period           2,011         2,031


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The following table summarizes IHOP restaurant development activity during the three months ended March 31, 2014 and 2013:

                                                    Three Months Ended
                                                         March 31,
                                                     2014         2013
                                                       (Unaudited)
IHOP Restaurant Development Activity
Summary - beginning of period:
Franchise                                           1,439         1,404
Area license                                          168           165
Company                                                13            12
Total IHOP restaurants, beginning of period         1,620         1,581

Franchise/area license restaurants opened:
Domestic franchise                                      9             8
Domestic area license                                   1             2
International franchise                                 4             2
Refranchised from Company                               3             -
Total franchise/area license restaurants opened        17            12
Franchise/area license restaurants closed:
Domestic franchise                                     (5 )          (4 )
International franchise                                (1 )           -
International area license                             (1 )           -
Total franchise/area license restaurants closed        (7 )          (4 )
Net franchise/area license restaurant additions        10             8

Summary - end of period:
Franchise                                           1,449         1,410
Area license                                          168           167
Company                                                10            12
Total IHOP restaurants, end of period               1,627         1,589


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Restaurant Data

The following table sets forth, for the three months ended March 31, 2014 and 2013, 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
                                                  -           March 31,
                                                           2014         2013
                                                            (Unaudited)
Applebee's Restaurant Data
Effective Restaurants(a)
Franchise                                                 1,985        2,006
Company                                                      23           23
Total                                                     2,008        2,029

System-wide(b)
Sales percentage change(c)                                 (0.7 )%      (0.4 )%
Domestic same-restaurant sales percentage change(d)        (0.5 )%      (1.3 )%

Franchise(b)
Sales percentage change(c) (e)                             (0.7 )%       7.2  %
Domestic same-restaurant sales percentage change(d)        (0.5 )%      (1.2 )%
Average weekly domestic unit sales (in thousands)      $   49.5       $ 49.3

IHOP Restaurant Data
Effective Restaurants(a)
Franchise                                                 1,439        1,408
Area license                                                169          167
Company                                                      11           12
Total                                                     1,619        1,587

System-wide(b)
Sales percentage change(c)                                  6.5  %       2.4  %
Domestic same-restaurant sales percentage change(d)         3.9  %      (0.5 )%

Franchise(b)
Sales percentage change(c)                                  6.4  %       2.3  %
Domestic same-restaurant sales percentage change(d)         3.9  %      (0.5 )%
Average weekly domestic unit sales (in thousands)      $   36.4       $ 34.9

Area License(b)
Sales percentage change(c)                                  8.0  %       4.1  %


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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 franchisees and area licensees as well as those owned by the Company.

(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, 2014 and 2013 were as follows:

                                           Three Months Ended
                                               March 31,
                                           2014          2013
                                            (In millions)
Reported sales (unaudited)
Applebee's franchise restaurant sales   $  1,183.1    $ 1,191.5
IHOP franchise restaurant sales         $    680.3    $   639.3
IHOP area license restaurant sales      $     70.1    $    64.9

(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 fiscal period, 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 months ended March 31, 2013 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 0.5% for the three months ended March 31, 2014 from the same period in 2013. A decline in customer traffic was partially offset by an increase in average customer check. Same-restaurant sales performance for the first three months of 2014 is not necessarily indicative of results expected for the full year.

[[Image Removed]]
IHOP's domestic system-wide same-restaurant sales increased 3.9% for the three months ended March 31, 2014 from the same period in 2013, the fourth consecutive quarterly increase in same-restaurant sales. The improvement resulted from a higher average customer check partially offset by a slight decrease in customer traffic. Same-restaurant sales performance for the first three months of 2014 is not necessarily indicative of results expected for the full year.

Both of our brands experienced a decline in customer traffic during the three months ended March 31, 2014. Based on data from Black Box, customer traffic declined during that period for the restaurant industry overall, as well as for both the casual dining and family dining segments of the restaurant industry. We believe the inclement weather experienced by much of the country during the first quarter exacerbated the traffic decline of both our brands and the restaurant industry as a whole. In the short term, a decline in customer traffic may be offset by an increase in average customer check resulting from an increase in menu prices, a favorable change in product sales mix, or a combination thereof. A sustained decline in same-restaurant customer traffic that cannot be offset by an increase in average customer check could have an adverse effect on our business, results of operations and financial condition.


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We continue to evaluate opportunities to improve same-restaurant sales and traffic. We focus on differentiating our two brands through innovative advertising, enhancing our menus and bar offerings, achieving operational excellence each day, and keeping our restaurants contemporary. To drive each brand forward, we will leverage what has worked to improve sales, while remaining focused on generating sustainable positive traffic. A key element of our strategy includes updating the core menus of each brand several times per year. Our first IHOP update of 2014 added Sweet Cream Cheese Crepes, available with different fruit toppings, as well as the integration of spicy flavor into several menu items. Applebee's renowned "2 for $20" offering was updated with two new "Fresh Flavors of the Southwest" dishes, Citrus Lime Sirloin and Chicken & Shrimp Tequila Tango.

Applebee's franchisees remodeled 64 restaurants in the first quarter of 2014. At the end of the quarter, 75% of the domestic Applebee's system had the new revitalized look and we project that the remodel program will be 95% complete by the end of this year.

Franchisee Matters

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 quarter of 2013. A non-cash charge of $0.5 million was recorded in the Consolidated Statement of Comprehensive Income against deferred rental revenue associated with the leases for those two restaurants. During the third quarter of 2013, we received favorable rulings from the bankruptcy court which, if upheld, would allow us to transfer the remaining 17 restaurants to another franchisee. These rulings have been appealed by the current franchisee and are presently subject to a stay, pursuant to which the current franchisee is operating these restaurants only on a day-to-day basis and is continuing to make payments to us pursuant to the terms of the original franchise agreements.

                             RESULTS OF OPERATIONS
          Comparison of the Three Months Ended March 31, 2014 and 2013

SUMMARY
                                       Three Months Ended
                                           March 31,                   Favorable
                                        2014         2013        (Unfavorable) Variance
                                                        (In millions)
Revenue                             $   167.2      $ 163.2     $                4.0
Segment profit                           97.1         94.4                      2.7
Segment profit as % of revenue           58.1 %       57.9 %                    0.2 %
General & administrative expenses        34.2         34.0                     (0.2 )
Interest expense                         25.0         25.3                      0.3
Debt modification costs                     -          1.3                      1.3
Other expenses, net (1)                   4.2          3.6                     (0.6 )
Income tax provision                     12.9         12.0                     (0.9 )
Effective tax rate                       38.2 %       39.6 %                    1.4 %
Net income                          $    20.8      $  18.2     $                2.6



(1) Amortization of intangible assets, closure and impairment charges, loss on extinguishment of debt and gain/loss on disposition of assets

Net income for three months ended March 31, 2014 increased 14.1% compared with the same period of the prior year. This was primarily due to an increase in franchise segment profit that resulted from a 3.9% increase in IHOP's domestic same-restaurant sales and a 2.1% increase in the weighted average number of IHOP franchise and area license restaurants open during the period. Additionally, we had incurred $1.3 million in debt modification costs during the three months ended March 31, 2013 with no similar costs in 2014. General and administrative ("G&A") and interest expenses were essentially consistent with the prior year period.


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REVENUE
                    Three Months Ended
                         March 31,                    Favorable
                      2014           2013       (Unfavorable) Variance
                      (In millions)
Franchise       $    115.5         $ 111.9    $                3.6
Company               16.3            16.5                    (0.2 )
Rental                30.7            31.0                    (0.3 )
Financing              4.7             3.8                     0.9
Total revenue   $    167.2         $ 163.2    $                4.0

Total revenue for the three months ended March 31, 2014 increased 2.5% compared to the prior year. The improvement was primarily due to higher franchise revenues that resulted from an increase in IHOP same-restaurant sales during the quarter and IHOP restaurant development over the past twelve months. Financing segment revenues increased due to fees of $1.4 million associated with the negotiated early termination of two leases. Early lease terminations such as these occur relatively infrequently and should not be considered indicative of any trend with respect to financing segment revenue.

SEGMENT PROFIT (LOSS)

                                   Three Months Ended
                                       March 31,                   Favorable
                                    2014          2013       (Unfavorable) Variance
. . .
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