DineEquity, Inc., the parent company of Applebee’s Neighborhood Grill & Bar and IHOP Restaurants, today announced financial results for the third quarter ended September 30, 2011.
“During the quarter, we made good progress in achieving our long-term strategic goals as we continued to generate strong free cash flow, improve our G&A, refranchise company-operated restaurants and create value for our shareholders,” said Julia A. Stewart, Chairman and Chief Executive Officer of DineEquity. “While same-restaurant sales were not what we would have liked, we are confident in the plans we have at both brands to achieve our longer-term financial objectives. With about 95% of our restaurants either franchised or soon to be franchised, we are close to completing the planned transformation of the Company into a pure franchisor and creating a platform upon which we will continue generating strong cash flow going forward.”
DineEquity’s financial performance included the following highlights:
- Adjusted net income available to common stockholders was $19.1 million for the third quarter 2011, compared to $16.6 million for the same quarter in 2010. The increase in adjusted net income was primarily due to the elimination of the dividend on Series A perpetual preferred stock and lower cash interest expense, partially offset by lower profit due to the refranchising of 149 Applebee’s company-operated restaurants. Adjusted EPS was $1.04 per diluted share for the third quarter 2011. (See “Non-GAAP Financial Measures” below.)
- For the first nine months of 2011, adjusted net income available to common stockholders was $61.7 million, or $3.37 per diluted share, compared to $51.1 million, or $2.92 per diluted share, in the same period in 2010. The increase in adjusted net income was primarily due to the elimination of the dividend on Series A perpetual preferred stock, lower cash interest expense, and a lower tax rate, partially offset by lower segment profit due to refranchising. (See “Non-GAAP Financial Measures” below.)
- Net income available to common stockholders was $15.5 million, or $0.85 per diluted share, for the third quarter 2011, compared to net income of $7.8 million, or $0.44 per diluted share, for the same quarter in 2010. The increase in net income was due to 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, partially offset by refranchising a total of 149 restaurants.
- For the first nine months of 2011, net income available to common stockholders was $43.4 million, or $2.38 per diluted share, compared to $28.0 million, or $1.60 per diluted share in the same period in 2010. The increase was due in part to lower interest expense, the elimination of the dividend on Series A preferred stock, and a gain on the sale of 66 Applebee’s company-operated restaurants in the St. Louis and Washington, D.C. areas. These items were partially offset by impairment and closure charges related to the termination of the sublease for the Applebee’s restaurant support center in Lenexa, Kansas, lower segment profit largely driven by refranchising, and higher debt extinguishment charges.
- Under the $45 million share repurchase authorization announced in August 2011, the Company repurchased 534,101 shares of its common stock in the third quarter for a total of $21.2 million.
- Total debt was reduced by $193.1 million over the first nine months of 2011 as a result of net cash proceeds and financing obligation reductions from the sale of 66 Applebee’s company-operated restaurants in the St. Louis and Washington, D.C. areas, cash on hand, and free cash flow. The company has reduced term loan balances by $110.0 million, retired $39.8 million of the 9.5% senior notes and $43.3 million of financing and capital lease obligations for the first nine months of the year.
- For the first nine months of 2011, cash flows from operating activities were $95.1 million, consolidated capital expenditures were $20.8 million, and free cash flow was $84.2 million. (See “Non-GAAP Financial Measures” below.)
- Consolidated general and administrative expenses decreased 2.2% to $38.7 million for the third quarter 2011, compared to the third quarter of 2010. For the year-to-date period, consolidated general and administrative expenses decreased 1.6% to $115.2 million versus the same period in 2010.
- Applebee’s company-operated restaurant operating margin was 14.2% in the third quarter 2011, compared to 14.8% for the third quarter 2010. The unfavorable comparison was primarily due to increasing commodity costs and investments in local advertising, partially offset by the refranchising of lower margin restaurants. For the first nine months of 2011, Applebee’s company-operated restaurant operating margin was 14.4%, compared to 14.6% for the same period in 2010.
- IHOP franchisees and its area licensees opened 39 new restaurants worldwide in the first nine months of 2011, in line with our full-year IHOP development outlook.
Same-Restaurant Sales Performance
- Applebee’s domestic system-wide same-restaurant sales decreased 0.3% for the third quarter 2011, which represented the first quarter of negative same-restaurant sales since the second quarter of 2010. The same-restaurant sales performance was driven by a decrease in guest traffic, partially offset by an increase in average guest check. Domestic franchise same-restaurant sales decreased 0.4% and company-operated Applebee’s same-restaurant sales increased 0.1% for the third quarter 2011, compared to the same quarter in 2010.
- IHOP’s domestic system-wide same-restaurant sales decreased 1.5% for the third quarter 2011, compared to the same quarter in 2010. Same-restaurant sales reflected declines in traffic and a higher average guest check.
Recent Developments
On August 15, 2011, DineEquity announced the approval by the Company’s Board of Directors of the repurchase of up to $45 million of the Company’s outstanding common stock. Under the program, DineEquity may repurchase shares on an opportunistic basis from time to time in open market transactions and in privately negotiated transactions, based on business, market, applicable legal requirements and other considerations. The repurchase program does not require the company to repurchase any specific number of shares, and may be terminated at any time.
On October 13, 2011, the Company announced that it entered into an asset purchase agreement with Apple Investors Group, LLC for the sale of 17 Applebee’s company-operated restaurants located in Tennessee, Illinois, Mississippi, Missouri, Kentucky and Arkansas. The transaction is expected to result in net proceeds after taxes of approximately $15.9 million and reduce DineEquity’s sale-leaseback related financing obligations by $11.3 million. The Company expects to pay approximately $2.4 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 $0.9 million in annualized consolidated general and administrative expense savings. The Company anticipates closing the transaction in the first quarter of 2012.
On November 2, 2011, DineEquity successfully completed the sale of 62 restaurants from the previously-announced transaction involving 66 company-operated Applebee’s restaurants located in New England. The four remaining restaurants are expected to close soon.
2011 Financial Performance Outlook
Given that DineEquity’s brands are nearly 95% franchised, the Company is providing an adjusted earnings per share (EPS) outlook as it believes that adjusted EPS, along with cash flow and same-restaurant sales, are key measures by which the Company will be evaluating its success going forward. The strength of the Company’s fully franchised business model is that it somewhat mitigates earnings fluctuations based on restaurant sales. The Company expects adjusted earnings per share (EPS) to range between $4.20 and $4.30 per diluted share. (See “Non-GAAP Financial Measures” below.)
Additionally, DineEquity provided the following fiscal 2011 guidance:
- Revised consolidated cash from operations to range between $117 and $127 million, which reflects a reduction from previous expectations of $125 to $135 million. Revised consolidated free cash flow to range between $104 and $114 million, which reflects a reduction from previous expectations of $112 to $122 million. The $8 million reductions in consolidated cash from operations and consolidated free cash flow relate solely to the net working capital impact of the refranchising of 66 Applebee’s company-operated restaurants in New England as previously discussed in our May 31, 2011 press release. (See “Non-GAAP Financial Measures” below.)
- 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.
- Revised Applebee’s domestic system-wide same-restaurant sales performance to range between 1.5% and 2.0%, a reduction from previous expectations of between 2% and 4%.
- Revised IHOP’s domestic system-wide same-restaurant sales performance to range between negative 2.0% and negative 2.5%, a reduction from previous expectations of between positive 1% and negative 2%.
- Revised restaurant operating margin at Applebee’s company-operated restaurants to range between 14.4% and 14.8%. This reflects a reduction from previous expectations of 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.
- Narrowed the range of new restaurants to be developed by IHOP franchisees to between 55 and 60, 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.