With more than 3,600 restaurants combined in 18 countries, more than 400 franchisees and approximately 200,000 team members (including franchisee- and company-operated restaurant employees), DineEquity (DIN, Financial) is one of the largest full-service restaurant companies in the world.
DineEquity has re-energized its brands through enhanced marketing, extensive menu innovation and operational strategies. The company has successfully transformed its IHOP restaurant system into one that is 99% franchised and, as of October 2012, has achieved that goal with Applebee’s as well. DineEquity has refranchised a substantial majority of Applebee’s company-operated restaurants and expects to realize significant cost savings as a result.
It became 99% franchised in 2012. Since 2007, it has reduced its total debt by $1 billion. In the year 2014, DineEquity announced a new capital allocation strategy and generated approximately $113 million of which nearly $75 million were returned to the shareholders in the form of cash dividends.
Applebee's Grill & Bar offers a lively bar and grill experience with an array of flavorful, handcrafted drinks, appetizers and entrees that constantly evolve. Based in Kansas City, Missouri, Applebee's has more than 2,000 locations in 49 states, 16 countries and one U.S. territory. In its 35 years, Applebee's has grown to become the nation's leading casual dining chain.
Restaurant stocks are booming, and this company is no exception. Perceptions have changed regarding the way people eat out. This company posted a solid fourth quarter report and is expected to create shareholder returns in the near future.
Investors should add this company to their portfolios. During the quarter, it reported significant growth in adjusted earnings per diluted share, implemented strategic initiatives to accelerate growth across both brands and substantially expanded the international pipeline for longer-term restaurant development.
Strong fourth quarter
Adjusted net income available to common stockholders was $29.5 million, or adjusted earnings per diluted share of $1.59, for the fourth quarter of 2015 (which was $21.9 million, or adjusted earnings per diluted share of $1.16, during the prior-year quarter). The increase in adjusted net income was mainly due to higher gross profit, including the positive effect of the 53rd calendar week in fiscal 2015. The increase was partially offset by higher income taxes.
GAAP net income available to common stockholders was $25 million for the fourth quarter of 2015, or earnings per diluted share of $1.35 (which was a GAAP net loss available to common stockholders of $22.1 million, or a net loss per share of $1.18, during the prior-year quarter). The increase was mainly due to a loss on the extinguishment of debt in the fourth quarter of 2014 that did not recur in the fourth quarter of 2015, higher gross profit, including the positive effect of the 53rd calendar week in fiscal 2015 and a decline in interest expense. The increase was partially offset by higher income tax expense.
Dividend
During February, the company announced that its board of directors declared a first quarter cash dividend of 92 cents per share of common stock. The dividend will be payable on April 8 to stockholders of record at the close of business on March 18.
Full-year 2015 results
Adjusted net income available to common stockholders was $116.1 million, or adjusted earnings per diluted share of $6.19, for fiscal 2015 (which was $89.6 million, or adjusted earnings per diluted share of $4.73, during the prior-year period). The increase in adjusted net income was primarily due to a significant decline in cash interest expense and higher gross profit, including the positive effect of the 53rd calendar week in fiscal 2015.
GAAP net income available to common stockholders was $103.5 million for fiscal 2015, or earnings per diluted share of $5.52 (which was a net income of $35.9 million, or earnings per diluted share of $1.90, during the prior-year period). The increase was primarily due to a loss on the extinguishment of debt in the fourth quarter of 2014 that did not recur in the fourth quarter of 2015, a significant decline in interest expense and higher gross profit, including the positive effect of the 53rd calendar week in fiscal 2015.
In fiscal 2015, cash flows from operating activities were $135.5 million (which was $118.5 million during the prior-year period). Free cash flow was $142.3 million (which was $120.9 million during the prior-year period).
Same-restaurant sales performance
Fourth quarter of fiscal 2015
- IHOP's domestic systemwide comparable same-restaurant sales increased 1.4% for the fourth quarter of 2015.
- Applebee's domestic systemwide comparable same-restaurant sales declined 2.5% for the fourth quarter of 2015.
Fiscal 2015
- IHOP's domestic systemwide comparable same-restaurant sales increased 4.5% for fiscal 2015.
- Applebee's domestic systemwide comparable same-restaurant sales increased 0.2% for fiscal 2015.
Expectations for 2016
The company expects the following:
- Applebee's domestic systemwide same-restaurant sales performance to be between negative 2% and positive 2%.
- IHOP's domestic systemwide same-restaurant sales performance to be between positive 1% and positive 4%.
- Applebee's franchisees to develop between 35 and 45 new restaurants, the majority of which are expected to be domestic openings.
- IHOP franchisees and its area licensee to develop between 60 and 70 restaurants, the majority of which are expected to be domestic openings.
- Franchise segment profit to be between $345 million and $360 million.
- Rental and Financing segments to generate $40 million in combined profit.
- General and administrative expenses to range between $154 million and $158 million, including noncash stock-based compensation expense and depreciation of $20 million. This amount includes $4 million of nonrecurring costs related to restaurant support center consolidation.
- Interest expense to be $62 million with $3 million to be noncash interest expense.
- Weighted average diluted shares outstanding to be 18.5 million shares.
- The income tax rate to be 37%.
- Cash flow provided by operating activities to range between $115 million and $125 million.
- Capital expenditures to be $8 million.
- Free cash flow to range between $116 million and $126 million. Guidance reflects nonrecurring tax payments totaling $10 million related to deferred gains from the repurchase of debt, primarily in 2008 and 2009, $6 million in cash payments related to our restaurant support center consolidation and the impact of fiscal 2016 containing 52 weeks compared to 53 weeks in fiscal 2015, taking into account the effects to working capital, including gift card receivables.
- Cashflows from operations to be in the range of $115 to $125.
- Capex to be $8 million.
(Source: Company’s website)
Current focus
- Innovate and evolve strong brands.
- Manage costs.
- Facilitate franchisee development.
- International development and brand building.
Positive attributes
- It reduced G&A by $50 million.
- Tireless focus on making its iconic brands stronger.
- Implemented a Shared Services Model.
- Returning significant cash to shareholders.
A peek into the restaurant industry
According to reports, the U.S. economy surged by 5% in the third quarter of 2014 (since 2003, this has been the strongest three-month period). Consumer behavior has changed and so the restaurants have come up with different marketing strategies – loyalty programs, ordering, etc.
As per the National Restaurant Association, restaurant industry sales are expected to reach $783 billion in 2016 and will represent the seventh consecutive year of real growth in restaurant sales. Further, the National Restaurant Association has predicted that the restaurant industry will remain the nation’s second-largest private sector employer with a workforce of 14.4 million and will create 1.7 million new restaurant jobs by 2026.
On a concluding note
DineEquity is growing with a continued momentum. It is currently focusing on its iconic brands and cost curtailment. In the year 2015, it generated robust cashflows to its shareholders. DineEquity is making prudent investments to support future growth and will incur incremental costs to support its newly securitized debt structure. Its debt structure locks in an attractive interest rate of 4.28% through 2021.
Both their brands gained No. 1 slots many times, according to the latest ranking by Nation’s Restaurant News on the basis of U.S systemwide sales. DineEquity’s CEO, Julia Stewart, has over 40 years of experience in the restaurant industry with more than 16 of those years spent in the Applebee’s and IHOP systems. With over 3.5 million likes, IHOP has the most fans on Facebook (FB, Financial) among the competitive set. IHOP owns approximately 67% of the total breakfast conversations on Twitter (TWTR, Financial) among the competitive set. DineEquity and its franchisees are making significant investments in important initiatives to drive sales and traffic at both brands.
Disclosure: I do not hold any position in the company.
