Revenue, Margins Improve at DineEquity
DineEquity Inc. announces third quarter 2009 financial results; financial performance remains strong; positioning Applebee's and IHOP for market share expansion with economic recovery.
-- Chain Leader, 10/27/2009 9:24:00 AM
PRESS RELEASE: GLENDALE, CA--(Marketwire - October 27, 2009) - DineEquity, Inc. (NYSE: DIN), the parent company of Applebee's Neighborhood Grill & Bar and IHOP Restaurants, today announced financial results for the third quarter ended September 30, 2009. DineEquity's financial performance for the third quarter and first nine months of 2009 included the following highlights:
-- Diluted net income per share available to common shareholders (EPS)
for the third quarter 2009 increased by $1.44 to $0.46 compared to a net
loss of $0.98 in the same quarter last year. Year-to-date, diluted EPS
increased by $5.25 to $3.34 compared to a net loss of $1.91 in the same
period last year. These increases were primarily due to lower impairment
charges, gains on debt retirement, reductions in General & Administrative
(G&A) spending, better operating margins at company-operated Applebee's
restaurants and lower interest expense. These improvements were partially
offset by lower same-store sales and the impact of the sale of 110 company-
operated Applebee's restaurants over the past year. Excluding impairment
charges and gains on debt retirement and asset disposals, diluted EPS for
the third quarter 2009 increased by $0.63 to $0.55 compared to a net loss
of $0.08 in the same quarter last year, and increased year-to-date by $1.58
to $2.02 compared to $0.44 in the same period last year.
-- For the quarter, IHOP's domestic system-wide same-store sales
decreased 1.1% and Applebee's domestic system-wide same-store sales
decreased 6.5% compared to the same quarter last year. Year-to-date,
domestic system-wide same-store sales increased 0.2% for IHOP and decreased
4.5% for Applebee's compared to the same period last year.
-- DineEquity's predominantly franchised Applebee's and IHOP restaurant
systems generated consolidated franchise operations revenue increases of
3.2% for the quarter and 5.3% year-to-date compared to the same periods
last year primarily due to increases in the number of effective Applebee's
and IHOP franchise restaurants. Consolidated franchise operations segment
profitability increased 2.6% for the quarter and 3.5% year-to-date,
compared to the same periods last year.
-- Restaurant operating margins at Applebee's company-operated
restaurants improved 220 basis points to 13.6% for the quarter and improved
270 basis points to 14.7% year-to-date compared to the same periods last
year. These improvements primarily reflected better management of food and
labor costs as Applebee's continues to enhance the profit performance of
its company-operated restaurants despite lower sales levels.
-- Consolidated G&A expenses decreased 14.1% for the quarter and 15.6%
year-to-date compared to the same periods last year. These improvements
are primarily due to lower overhead expense as a result of the sale of 110
company-operated Applebee's restaurants over the past year, the integration
of Applebee's and IHOP shared services functions, other cost savings
initiatives executed in 2009, lower stock based compensation expense and
the elimination of non-recurring transition costs recognized last year.
-- Cash flows from operating activities for the first nine months of 2009
were $102.9 million compared to $61.3 million in the same period last year.
The increase of $41.7 million is the result of higher net income excluding
gains and charges, as well as lower working capital requirements.
-- Consolidated capital expenditures were $9.5 million for the first nine
months of 2009.
-- Free cash flow was $90.6 million for the first nine months of 2009
(see "References to Non-GAAP Financial Measures" below).
-- Funded debt was reduced by $142.3 million for the first nine months of
2009 primarily due to the use of free cash flow for opportunistic debt
retirement, normal amortization and the sale of seven company-operated
Applebee's restaurants in 2009.
"Our third quarter and year-to-date financial results were solid and demonstrated that our business fundamentals remain strong as we navigate the current economic environment. The profitability of our core franchising business improved primarily due to the continued development of IHOP restaurants by franchisees. We delivered significant margin improvement at Applebee's company-operated restaurants, despite the challenging same-store sales environment. We benefited from lower levels of G&A due to aggressive spending control. These efforts, among others, generated significant consolidated free cash flow, a key measure of our financial strength. Our strong financial results reflected the disciplined execution of our strategies as we optimized the performance of our business and maintained our financial flexibility for the future," said Julia A. Stewart, DineEquity's chairman and chief executive officer.
"We are making meaningful progress in energizing the Applebee's brand, with numerous marketing, menu and operational improvements achieved since we completed the acquisition nearly two years ago. We are confident that these efforts, along with additional improvements, will result in market share expansion as the economy begins to grow again. With both Applebee's and IHOP, we are not simply focused on surviving the current economy, but are positioning both brands for sustained leadership over the long term; we are confident we have the right strategies in place to achieve this in the years ahead," Stewart commented.
Same-Store Sales Performance
IHOP's domestic system-wide same-store sales decreased 1.1% for the third quarter 2009 compared to the same quarter last year, reflecting a higher average guest check and a decline in guest traffic. Year-to-date, IHOP's domestic system-wide same-store sales increased 0.2%. IHOP's marketing efforts during the quarter included limited-time offers Hawaiian Pancakes and IHOP's Gone Totally NFL, expanded marketing activities around the dinner daypart including IHOP's Kids Eat Free program, and a system-wide menu update. For the balance of the year, IHOP expects to benefit from the introduction of its Holiday Hotcakes limited-time offer, increased consumer awareness generated from the third-party distribution of IHOP gift cards at well known retailers nationwide, and continued local restaurant marketing efforts targeted at the dinner daypart, among other activities.
Applebee's domestic system-wide same-store sales decreased 6.5% for the third quarter 2009 compared to the same quarter last year, and decreased 4.5% for the first nine months of 2009 compared to the same period last year. Same-store sales for Applebee's domestic franchise restaurants decreased 6.2% for the quarter compared to the same quarter last year, and decreased 4.4% year-to-date compared to the same period last year. Same-store sales for Applebee's company-operated restaurants decreased 7.6% for the quarter compared to the same quarter last year, and decreased 5.1% year-to-date compared to the same period last year. The performance of company-operated Applebee's for the quarter reflected a higher average guest check due primarily to cumulative pricing increases of 2.4% and a decline in guest traffic. Applebee's marketing efforts during the quarter focused on its Two for $20 value offering, which was updated with the addition of new rib options. For the balance of 2009, Applebee's expects to benefit from the continuation of its Two for $20 value offering, two system-wide menu updates expected in the fourth quarter 2009, enhanced marketing strategies including a partnership with ESPN around football advertising, and Applebee's Veteran's Day event, among other activities.
Stewart commented, "We continue to face a very difficult economic environment that is affecting customer behavior and putting pressure on same-store sales not only for our Company, but across the restaurant industry at large. While we were disappointed with our same-store sales performance for the quarter, Applebee's and IHOP remain focused on delivering value in ways that protect and build our brands for the long term. We remain confident in meeting our full year domestic system-wide same-store sales expectations for Applebee's and IHOP as both brands possess a strong line up of marketing, menu and operational activities that will continue to differentiate our brands and optimize our competitive position for the balance of 2009 and beyond."
Company Operations Improvements
For the third quarter 2009, sales at company-operated Applebee's restaurants decreased 22.7% to $202.5 million compared to the same quarter last year, primarily due to a 17.0% decrease in the number of effective restaurants as a result of the sale of 110 company-operated restaurants over the past year. Restaurant operating margin improved 220 basis points to 13.6% for the quarter compared to an 11.4% operating margin in the same quarter last year. Applebee's improved operating margin performance for the quarter was due primarily to the impact of menu price increases, improvements in hourly labor from better wage rate management and improved productivity, as well as a reduction in management incentive expense mainly due to nonrecurring retention costs in 2008.
Year-to-date, sales at company-operated Applebee's restaurants decreased 23.9% to $656.5 million compared to the same period last year, primarily due to a 19.8% decrease in the number of effective restaurants as a result of the sale of 110 company-operated restaurants over the past year. Restaurant operating margin improved 270 basis points to 14.7% year-to-date compared to a 12.0% operating margin in the same period last year. Applebee's improved operating margin performance for the first nine months of 2009 was primarily due to the impact of menu price increases, a reduction in management incentive expense, improvements in hourly labor from better wage rate management and improved productivity, which were partially offset by slightly higher commodity costs.
Company Restaurant Franchising Update
DineEquity remains committed to its strategic objective of transitioning Applebee's into a more highly franchised restaurant system over time, and continues to market substantially all of its company-operated Applebee's restaurants. This effort could result in single market or multiple market transactions. The timing of transactions could be highly variable due to the availability of financing to prospective buyers, acceptable deal valuations and other terms, as well as the operating plan and infrastructure of the prospective buyers, among other factors.
In the meantime, DineEquity believes it will continue to generate sufficient cash flows from operating activities to meet obligations under its debt covenants, so that the Company will not be compelled to sell Applebee's company-operated restaurants on terms deemed undesirable. The Company expects to continue to meet its debt covenant obligations for at least the next 12 months without the further sale of company-operated restaurants, assuming that there is not a material adverse deterioration in the Company's current operating fundamentals.
Debt Management
Funded debt was reduced by $4.7 million for the third quarter 2009 due to after-tax proceeds generated from the sale of two company-operated Applebee's restaurants and scheduled payments on the Company's subordinated notes. DineEquity did not pursue opportunistic debt retirement efforts during the third quarter 2009 primarily due to restrictions associated with the timing and status of the generation and reporting of the Company's financial results and negotiations related to the sale of company-operated Applebee's, among other factors. Funded debt was reduced by $142.3 million for the first nine months of 2009. The decrease was primarily due to the use of free cash flow for opportunistic debt retirement, after-tax proceeds related to the sale of seven company-operated Applebee's restaurants, and scheduled payments on the Company's subordinated notes. DineEquity remains dedicated to using a substantial portion of its free cash flow for opportunistic debt retirement for the foreseeable future.
As of the end of the third quarter 2009, DineEquity remained comfortably in compliance with the debt covenants set forth in the Company's securitized debt agreements. The Company's consolidated leverage ratio was 5.97x compared to a required maximum threshold of 7.5x. On November 29, 2009, DineEquity's consolidated leverage ratio maximum threshold declines to 7.0x, with no further future reductions required under its securitized debt agreements. Debt service coverage ratios were 3.47x for IHOP's securitization on a three-month unadjusted basis and 2.98x for the Applebee's securitization on a three-month adjusted basis, both compared to a minimum required threshold of 1.85x.
DineEquity has provided supplemental information to this news release regarding its compliance with its debt covenants, which may be accessed by visiting the Calls & Presentations section of DineEquity's Investor Relations Web site at http://investors.dineequity.com and referring to supporting materials for the Company's third quarter 2009 webcast.
2009 Financial Guidance
DineEquity provided a guidance update on key financial performance metrics for 2009, which include:
-- Revised consolidated cash flows from operating activities expectations
to range between $130 and $140 million, compared to its previous
expectations of $115 and $125 million. This improved outlook is primarily
due to lower than expected tax payments and lower working capital
requirements for 2009. The Company expects to receive approximately $15
million in additional cash from the structural run-off of the IHOP business
unit's long-term notes receivable.
-- Revised consolidated capital expenditures expectations to be at the
lower end of the Company's previously expected range of between $13 and $16
million.
-- Revised consolidated G&A expenses expectations to range between $160
million and $165 million, compared to its previous expectations of $165 to
$175 million. This improved outlook is primarily due to a continued focus
on disciplined spending control.
-- Revised Applebee's domestic system-wide same-store sales performance
expectations to perform at the lower end of the Company's previously
expected range of between negative 2% to negative 5% for the full year
2009.
-- Reiterated full year 2009 operating margin performance for Applebee's
company-operated restaurants to range between 13.5% and 14.5%.
-- Reiterated IHOP's domestic system-wide same-store sales performance
expectations to range between positive 1% and negative 1% for the full year
2009.
Investor Conference Call Today
The Company will host an investor conference call today to discuss its third quarter 2009 financial results at 11:00 a.m. Eastern Time (8:00 a.m. Pacific Time). To participate on the call, please dial (888) 713-4215 and reference pass code 39231617. A live webcast of the call will be available on DineEquity's Web site at www.dineequity.com, and may be accessed by visiting Calls & Presentations under the site's Investor Information section. Participants should allow approximately ten minutes prior to the call's start time to visit the site and download any streaming media software needed to listen to the webcast. A telephonic replay of the call may be accessed through November 3, 2009 by dialing 888-286-8010 and referencing pass code 50657706. An online archive of the webcast also will be available on Investor Information section of DineEquity's Web site.
About DineEquity, Inc.
Based in Glendale, California, DineEquity, Inc., through its subsidiaries, franchises and operates restaurants under the Applebee's Neighborhood Grill & Bar and IHOP brands. With more than 3,400 restaurants combined, DineEquity is the largest full-service restaurant company in the world. For more information on DineEquity, visit the Company's Web site located at www.dineequity.com.
Forward-Looking Statements
There are forward-looking statements contained in this news release. They use such words as "may," "will," "expect," "believe," "plan," or other similar terminology, and include statements regarding the strategic and financial benefits of the acquisition of Applebee's International, Inc. ("Applebee's"). These statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results to be materially different than those expressed or implied in such statements. These factors include, but are not limited to: the implementation of DineEquity, Inc.'s (the "Company") strategic growth plan; the availability of suitable locations and terms for the sites designated for development; the ability of franchise developers to fulfill their commitments to build new restaurants in the numbers and time frames covered by their development agreements; legislation and government regulation including the ability to obtain satisfactory regulatory approvals; risks associated with the Company's indebtedness; conditions beyond the Company's control such as weather, natural disasters, disease outbreaks, epidemics or pandemics impacting the Company's customers or food supplies, or acts of war or terrorism; availability and cost of materials and labor; cost and availability of capital; competition; potential litigation and associated costs; continuing acceptance of the International House of Pancakes ("IHOP") and Applebee's brands and concepts by guests and franchisees; the Company's overall marketing, operational and financial performance; economic and political conditions; adoption of new, or changes in, accounting policies and practices; and other factors discussed from time to time in the Company's news releases, public statements and/or filings with the Securities and Exchange Commission, especially the "Risk Factors" sections of Annual and Quarterly Reports on Forms 10-K and 10-Q. Forward-looking information is provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these factors. In addition, the Company disclaims any intent or obligation to update these forward-looking statements.
Non-GAAP Financial Measures
This news release includes references to the Company's "net income (loss) available to common stockholders, excluding impairment and closure charges, gain on extinguishment of debt and gain on disposition of assets" and the non-GAAP financial measures "EBITDA" and "free cash flow." The former is computed for a given period by deducting from net income (loss) available to common stockholders for such period the effect of any impairment and closure charges and any gain related to debt extinguishment and disposition of assets incurred in such period. This is presented on an aggregate basis and a per share (diluted) basis. For the latter, the Company defines "EBITDA" for a given period as income before income taxes (including gain on extinguishment of debt) less interest expense, depreciation and amortization, impairment and closure charges, stock-based compensation, gain on sale of assets and non-cash amounts related to a captive insurance subsidiary, "EBITDAR" for a given period as EBITDA plus annualized operating lease expense (Rent), and "free cash flow" for a given period as cash provided by operating activities, plus receipts from notes and equipment contracts receivable ("long-term notes receivable"), less dividends and capital expenditures. Management utilizes EBITDA for debt covenant purposes and free cash flow to determine the amount of cash remaining for general corporate and strategic purposes after the receipts from long-term notes receivable, and the funding of operating activities, capital expenditures and preferred dividends. Management believes this information is helpful to investors to determine the Company's adherence to debt covenants and the Company's cash available for these purposes. EBITDA and free cash flow are supplemental non-GAAP financial measures and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles.
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