DineEquity, Inc., the parent company of Applebee’s Neighborhood Grill & Bar and IHOP Restaurants, today announced financial results for the second quarter ended June 30, 2011.
“Our second quarter results demonstrate another impressive performance by the team at Applebee’s, where we have now seen a full year of positive same-restaurant sales growth, evidence that our brand revitalization strategies are working and that guests are enthusiastically reengaging with Applebee’s,” said Julia Stewart, Chairman and Chief Executive Officer. “While we are disappointed with IHOP’s results, we believe we have identified the issues that need to be addressed to develop and execute a plan to restore same-restaurant sales growth at IHOP, the leader in family dining. Overall, we continue to make progress delivering against our strategic priorities giving us the confidence to reiterate all of the elements of our full-year outlook. In the quarter we announced another significant refranchising agreement at Applebee’s, taking us closer to our goal of becoming a more fully franchised system. We also announced international expansion plans for both Applebee’s and IHOP, and I am optimistic about the long-term potential these developments hold for DineEquity as we continue to focus on value, innovation and differentiation within both of our brands.”
DineEquity’s financial performance included the following highlights:
- Applebee’s domestic system-wide same-restaurant sales increased 3.1% compared to the same period in 2010. Applebee’s performance represented the fourth consecutive quarter of positive same-restaurant sales. Results were unfavorably impacted by the shift of the Easter holiday from the first quarter of 2010 to the second quarter of 2011. Excluding the negative impact of this holiday shift, same-restaurant sales would have been 3.8% for the quarter. Year-to-date, Applebee’s domestic system-wide same-restaurant sales increased 3.5%.
- IHOP’s domestic system-wide same-restaurant sales decreased 2.9% for the second quarter compared to the same period in 2010. Results were positively impacted by the shift of the Easter holiday (the opposite direction from Applebee’s). Excluding the impact of the holiday shift, IHOP’s same-restaurant sales would have declined 3.4% for the quarter. Year-to-date, IHOP’s domestic system-wide same-restaurant sales decreased 2.8%.
- Total debt was reduced by $189.4 million over the first six months of 2011 as a result of net cash proceeds and financing obligation reductions from the sale of 65 Applebee’s company-operated restaurants, cash on hand, and free cash flow. The company reduced term loan balances by $110.0 million, retired $39.8 million of the 9.5% senior notes and $39.6 million of financing and capital lease obligations in the first half of the year.
- Adjusted net income available to common stockholders was $16.6 million for the second quarter 2011, compared to $15.7 million for the same quarter in 2010. The increase in net income was primarily due to elimination of the dividend on Series A perpetual preferred stock and lower cash interest expense, partially offset by lower profit due to refranchising of 148 Applebee’s company-operated restaurants and a higher tax rate. Our non-GAAP effective tax rate for the second quarter 2011 was 42%. This rate was higher than our expected full year rate of 36% primarily due to the timing of discrete quarterly state tax charges, impacting our adjusted EPS by $0.10 per diluted share. Adjusted EPS was $0.90 per share for the quarter. With a normalized tax rate, adjusted EPS would have been $1.00 per diluted share.
For the first six months of 2011, adjusted net income available to common stockholders was $42.7 million, or $2.33 per diluted share compared to $34.4 million, or $1.97 per diluted share, in the same period in 2010. This increase was primarily due to the elimination of the dividend on Series A perpetual preferred stock and lower cash interest expense, partially offset by lower segment profit due to refranchising. (See “Non-GAAP Financial Measures” below.)
- Net loss available to common stockholders was $0.3 million, or $0.02 per diluted share, for the second quarter 2011, compared to net income of $7.4 million, or $0.42 per diluted share, for the same quarter in 2010. The decrease was due in part to closure charges related to the termination of the sublease of the space currently occupied by Applebee’s restaurant support center in Lenexa, Kansas and lower segment profit as a result of refranchising a total of 148 restaurants (of which 83 were completed in the fourth quarter of 2010 and 65 were completed in the first quarter of 2011). These items were partially offset by lower interest expense and the elimination of the dividend on Series A perpetual preferred stock as a result of redeeming this security in the fourth quarter of 2010.
For the first six months of 2011, net income available to common stockholders was $27.9 million, or $1.53 per diluted share, compared to $20.3 million, or $1.16 per diluted share. The increase was due in part to a gain on the sale of 65 Applebee’s company-operated restaurants, lower interest expense, the elimination of the dividend on Series A perpetual preferred stock and a lower tax rate. These items were partially offset by impairment and closure charges on the termination of the Lenexa lease, higher debt extinguishment charges, and lower segment profit largely driven by refranchising.
- IHOP franchisees and its area licensee opened 25 new restaurants worldwide in the first six months of 2011, in line with our full-year IHOP development outlook of 55 to 65 restaurants.
- Applebee’s company-operated restaurant operating margin was 13.4% in the second quarter 2011 compared to 14.1% for the second quarter 2010. The unfavorable comparison was primarily due to increasing commodity costs, higher training and staffing levels, higher utility rates and facility costs, partially offset by a price increase of 1.8% and refranchising of lower margin restaurants. For the first six months of 2011, Applebee’s company-operated restaurant operating margin was 14.5% compared to 14.4% for the same period in 2010.
- Consolidated general and administrative expenses increased 3.8% to $38.5 million for the second quarter 2011 compared to the second quarter of 2010. For the year-to-date period, consolidated general and administrative expenses decreased $1.0 million to $76.4 million versus the same period in 2010.
- For the first half of 2011, cash flows from operating activities were $48.2 million, consolidated capital expenditures were $13.5 million, and free cash flow was $41.7 million. (See “Non-GAAP Financial Measures” below.)
Same-Restaurant Sales Performance
Applebee’s domestic system-wide same-restaurant sales increased 3.1% for the second quarter 2011, which represented the fourth consecutive quarter of positive same-restaurant sales. The same-restaurant sales performance was driven by increases in average guest check and guest traffic. Domestic franchise same-restaurant sales increased 3.5% and company-operated Applebee’s same-restaurant sales increased 0.7% for the second quarter 2011 compared to the same quarter in 2010. Applebee’s marketing efforts during the quarter included “2 for $20 Flavors of Bourbon Street” and “Sizzling Entrees” as well as other marketing and promotional activities.
IHOP’s domestic system-wide same-restaurant sales decreased 2.9% for the second quarter 2011 compared to the same quarter in 2010. Same-restaurant sales reflect a higher average guest check and declines in traffic. Despite representing a significant portion of sales mix, “Chicken and Waffles” and “Double Cheese Scrambles” did not generate overall increases in sales.
Sale of 66 Applebee’s Company-Operated Restaurants
On May 31, 2011, DineEquity announced that it had entered into an asset purchase agreement with Apple American Group LLC for the sale of 66 Applebee’s company-operated restaurants located in New England. The transaction is expected to result in net proceeds after taxes of approximately $49 million and reduce DineEquity’s sale-leaseback related financing obligations by approximately $12 million, of which $9 million will be removed from DineEquity’s balance sheet. The Company expects to pay approximately $9 million related to the settlement of net working capital liabilities and deal costs. Additionally, the sale of these Applebee’s company-operated restaurants will result in approximately $3 million in annualized general and administrative savings. The Company anticipates closing this transaction by the end of the year.
Other Q2 Highlights
On May 9, 2011 IHOP announced the launch of the new IHOP at HOME™ line of premium frozen breakfast items that are inspired by the innovative and craveable flavors for which IHOP is known. The IHOP at HOME™ products such as French Toast Stuffed Pastries, Omelet Crispers and Griddle ‘n Sausage Wraps are now available at more than 3,000 Wal-Mart locations nationwide.
On June 20, 2011 the Company announced that IHOP had entered into a multi-restaurant franchise agreement for the development of 40 new IHOP restaurants in Kuwait, Saudi Arabia, Jordan, Lebanon, Qatar, the United Arab Emirates, Oman, Bahrain and Egypt. Development of all 40 restaurants will occur over the next five years, with some restaurants opening in as little as 12 months.
On July 21, 2011 the Company announced that Applebee’s had entered into a multi-restaurant franchise agreement for the development of ten new Applebee’s restaurants in Egypt.
2011 Financial Performance Outlook
- Reiterated consolidated cash from operations to range between $125 and $135 million.
- Reiterated that approximately $13 million is expected to be generated from the structural run-off of the Company’s long-term receivables.
- Reiterated consolidated capital expenditures of approximately $26 million.
- Reiterated consolidated free cash flow (see “References to Non-GAAP Information” below) to range between $112 and $122 million. The Company’s primary use of cash will be funding further debt reduction.
- Reiterated Applebee’s domestic system-wide same-restaurant sales performance to range between 2% and 4%.
- Reiterated IHOP’s domestic system-wide same-restaurant sales performance to range between positive 1% and negative 2%. For the full year, the Company expects IHOP to perform at the low end of the range.
- Reiterated restaurant operating margin at Applebee’s company-operated restaurants to range between 14.8% and 15.2%.
- Reiterated consolidated general & administrative expense to range between $157 and $160 million, including non-cash stock-based compensation expense and depreciation of approximately $18 million.
- Reiterated consolidated interest expense to range between $134 and $139 million, of which approximately $7 million is expected to be non-cash interest expense.
- Reiterated Applebee’s franchisees to develop between 24 and 28 new restaurants, approximately half of which are expected to open internationally.
- Reiterated IHOP franchisees to develop between 55 and 65 new restaurants, the majority of which are expected to be opened in the U.S.
- Reiterated an income tax rate of 36% for 2011.
- Reiterated full-year weighted average diluted shares outstanding to be approximately 18.3 million shares.
The Company’s 2011 financial performance guidance excludes any impact from the future sales of Applebee’s company-operated restaurants, the timing of which could be highly variable due to factors including the economy, the availability of buyer financing, acceptable valuations, and the operating wherewithal of the acquiring franchisee. Should additional Applebee’s company-operated restaurants be sold this year, DineEquity plans to update its performance guidance accordingly, in conjunction with its regular quarterly reporting schedule, following any transaction announcement.
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 3,500 restaurants combined, DineEquity is one of the largest full-service restaurant companies in the world.