DineEquity, Inc. Reports Second Quarter Fiscal 2017 Results

Dine Brands Global, Inc.
Published: August 10th, 2017

Second Quarter 2017 Summary

GAAP EPS of $1.18
Adjusted EPS (Non-GAAP) of $1.30
Domestic system-wide comparable same-restaurant sales declined 2.6% at IHOP and declined 6.2% at Applebee's

First Six Months of Fiscal 2017 Summary

GAAP EPS of $1.98
Adjusted EPS (Non-GAAP) of $2.51
Domestic system-wide comparable same-restaurant sales declined 2.1% at IHOP and declined 7.0% at Applebee's
Generated cash from operating activities of approximately $20.9 million and adjusted free cash flow (Non-GAAP) of approximately $19.2 million

GLENDALE, Calif. - Aug. 10, 2017 // PRNewswire // - DineEquity, Inc. (NYSE: DIN), the parent company of Applebee's Neighborhood Grill & Bar® and IHOP® restaurants, today announced financial results for the second quarter of fiscal 2017.

"We are investing in the empowerment of our brands by improving overall franchisee financial health, closing underperforming restaurants and enhancing the supply chain. We are focusing on operations and elevating the guest experience, whether in our restaurants or off-premise. We believe 2017 will be a transitional year for Applebee's and we are making the necessary investments for overall long-term brand health and expect to see improvement over the next year," said Richard J. Dahl, Chairman and interim Chief Executive Officer of DineEquity, Inc.

Mr. Dahl added, "IHOP remains on solid ground, despite soft sales this quarter. I am optimistic about the growth in both effective franchise restaurants and system-wide sales. IHOP is currently rolling out initiatives to address the convenience needs of our guests, which are inclusive of online ordering as well as accelerating tests for delivery and development of an IHOP mobile application. We believe these will create enhanced revenue channels."

Second Quarter of Fiscal 2017 Financial Highlights

GAAP net income available to common stockholders was $20.9 million for the second quarter of fiscal 2017, or earnings per diluted share of $1.18. This compares to net income available to common stockholders of $26.4 million, or earnings per diluted share of $1.45, for the second quarter of fiscal 2016. The decline in GAAP net income for the second quarter of 2017 compared to the same period of 2016 was mainly due to lower gross profit and higher income tax expense. The decrease in gross profit was due to a 6.2% decline in Applebee's domestic system-wide comparable same-restaurant sales, an increase in bad debt expense, restaurant closures and a reduction in revenue recognized due to the collectability of Applebee's franchisee royalties. These items were partially offset by a larger gain on the disposition of assets in the second quarter of 2017 compared to the same period of 2016. The impact of lower net income on earnings per diluted share was partially mitigated by fewer weighted average diluted shares outstanding for the second quarter of 2017 compared to the second quarter of 2016. Our effective tax rate for the second quarter of 2017 was 46.5% compared to 32.5% for the same quarter of 2016 primarily due to an increase in unrecognized tax benefits for deductions related to internal software development and the impact of new accounting guidance for share-based payments.

Adjusted net income available to common stockholders was $23.0 million, or adjusted earnings per diluted share of $1.30, for the second quarter of fiscal 2017. This compares to $28.8 million, or adjusted earnings per diluted share of $1.59, for the same period of fiscal 2016. The decrease in adjusted net income was mainly due to lower gross profit, as explained in the preceding paragraph. The impact of lower adjusted net income on adjusted earnings per diluted share was partially mitigated by fewer weighted average diluted shares outstanding. (See "Non-GAAP Financial Measures" below.)

General and administrative expenses were $37.4 million for the second quarter of fiscal 2017. This compares to approximately $36.5 million for the same quarter of fiscal 2016. The slight increase was mainly due to higher costs for professional services associated with investments in Applebee's stabilization initiatives, partially offset by a decrease in personnel-related costs.

First Six Months of Fiscal 2017 Financial Highlights

GAAP net income available to common stockholders was $35.0 million for the first six months of fiscal 2017, or earnings per diluted share of $1.98. This compares to net income available to common stockholders of $51.6 million, or earnings per diluted share of $2.82, for the first six months of fiscal 2016. The decrease in GAAP net income was primarily due to lower gross profit. The decrease in gross profit was due to a 7.0% decline in Applebee's domestic system-wide comparable same-restaurant sales, an increase in bad debt expense as well as restaurant closures and a reduction in revenue recognized due to the collectability of Applebee's franchisee royalties. In addition, general and administrative expenses increased for the first six months of 2017 compared to the same period of 2016. These items were partially offset by a gain on the disposition of assets in the first six months of 2017 compared to a loss in the same period of 2016. The impact of lower net income on earnings per diluted share was partially mitigated by fewer weighted average diluted shares outstanding for the first six months of 2017 compared to the same period of 2016.

Adjusted net income available to common stockholders was $44.6 million, or adjusted earnings per diluted share of $2.51, for the first six months of fiscal 2017. This compares to $58.0 million, or adjusted earnings per diluted share of $3.17, for the first six months of fiscal 2016. The decrease in adjusted net income was mainly due to lower gross profit, as explained in the preceding paragraph. The impact of lower adjusted net income on adjusted earnings per diluted share was partially offset by fewer weighted average diluted shares outstanding. (See "Non-GAAP Financial Measures" below.)

General and administrative expenses were $87.7 million the first six months of fiscal 2017 compared to $75.9 million for the same period of fiscal 2016. The increase was primarily due to approximately $9 million of non-recurring cash severance and equity compensation charges incurred in the first quarter of 2017 related to the separation of our previous chief executive officer and higher costs for professional services associated with investments in Applebee's stabilization initiatives, partially offset by a decline in recruiting and relocation costs as well as travel costs.

Cash flows from operating activities were $20.9 million for the first six months of fiscal 2017 compared to $53.9 million for the first six months of fiscal 2016. The decline was due to lower net income and unfavorable changes in net working capital. The unfavorable variance in working capital changes was mainly due to the timing of payments related to advertising funds. Adjusted free cash flow was $19.2 million for the first six months of fiscal 2017, compared to $56.4 million for the first six months of fiscal 2016. (See "Non-GAAP Financial Measures" below.)

Same-Restaurant Sales Performance
Second Quarter of Fiscal 2017

IHOP's domestic system-wide comparable same restaurant sales declined 2.6% for the second quarter of 2017.
Applebee's domestic system-wide comparable same-restaurant sales declined 6.2% for the second quarter of 2017.

First Six Months of Fiscal 2017

IHOP's domestic system-wide comparable same restaurant sales decreased 2.1% for the first six months of fiscal 2017.
Applebee's domestic system-wide comparable same-restaurant sales decreased 7.0% for the first six months of fiscal 2017.

Financial Performance Guidance for Fiscal 2017

The following projections for fiscal 2017 are based on management's expectations as of August 10, 2017. DineEquity reiterates its financial performance guidance for fiscal 2017 contained in the press release issued on May 2, 2017 and the Form 8-K filed on the same day, except for the revisions noted below.

Revised expectations for Applebee's domestic system-wide same-restaurant sales performance to range between negative 6.0% and negative 8.0%. This compares to previous expectations of between negative 4.0% and negative 8.0%.
Revised expectations for IHOP's comparable same-restaurant sales performance to range between negative 1.0% and negative 3.0%. This compares to previous expectations of between 0.0% to positive 3.0%.
Reiterates expectations for Applebee's franchisees to develop between 20 and 30 new restaurants globally, the majority of which are expected to be international openings.
Revised expectations for Applebee's closures to range between approximately 105 and 135 restaurants. This compares to previous expectations for closures of approximately 40 to 60 restaurants. The expected closures will be based on several criteria, including franchisee profitability, operational results and meeting our brand quality standards.
Revised expectations for IHOP franchisees and its area licensee to develop between 80 and 95 restaurants globally, the majority of which are expected to be domestic openings. This compares to previous expectations for development of 75 to 90 restaurants globally.
Revised expectations for IHOP closures to range between 20 and 25 restaurants. This compares to previous expectation for the closure of approximately 18 restaurants.
Revised expectations for Franchise segment profit to be between $302 million and $314 million. This compares to previous expectations of between $323 million and $338 million. This downward revision is primarily due to an expected contribution in the second half of 2017 of approximately $8 million to the Applebee's national advertising fund to mitigate the decline in franchisee contributions, additional expected reserves for collectability of Applebee's royalties, the revised guidance for both IHOP's comparable same-restaurant sales and Applebee's restaurant closures discussed above.
Reiterates expectations for the Rental and Financing segments to generate approximately $38 million in combined profit.
Revised expectations for general and administrative expenses to range between $166 million and $172 million, including non-cash stock-based compensation expense and depreciation of approximately $22 million. This compares to previous expectations for general and administrative expenses to range between $170 million and $177 million. The revised range is inclusive of approximately $10 million for Applebee's stabilization initiatives in fiscal 2017, of which we expect that a substantial amount will not recur. The range also includes approximately $9 million of non-recurring cash severance and equity compensation charges incurred in the first quarter of fiscal 2017.
Reiterates expectations for interest expense to be approximately $62 million. Approximately $3 million is projected to be non-cash interest expense.
Reiterates expectations for weighted average diluted shares outstanding to be approximately 18 million shares.
Revised expectation for the income tax rate to be approximately 40%. This compares to previous expectations for approximately 38%. The expected increase is primarily due to the impact of new accounting guidance for share-based payments.
Revised expectations for cash flows provided by operating activities to range between $80 million and $90 million. This compares to previous expectations of between $98 million and $108 million. The expected decline compared to fiscal 2016 is primarily due to projections for lower segment profit, partially offset by lower general and administrative expenses as discussed above.
Revised expectations for capital expenditures to be roughly $14 million, an increase of $2 million from the previous guidance.
Revised expectations for adjusted free cash flow (See "Non-GAAP Financial Measures" below) to range between $76 million and $86 million. This compares to previous expectations of between $96 million and $106 million.

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Investor Conference Call Today

DineEquity will host a conference call to discuss its results on the same day at 8:00 a.m. Pacific Time. To participate on the call, please dial (888) 771-4371 and reference passcode 45293838. International callers, please dial (847) 585-4405 and reference passcode 45293838. A live webcast of the call will be available at www.dineequity.com, and may be accessed by visiting Events and Presentations on the site's Investors 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 from 10:30 a.m. Pacific Time on August 10, 2017 through 8:59 p.m. Pacific Time on August 17, 2017 by dialing (888) 843-7419 and referencing passcode 45293838#. International callers, please dial (630) 652-3042 and reference passcode 45293838#. An online archive of the webcast will also be available on Events and Presentations under the Investors section of DineEquity's website.

About DineEquity, Inc.

Based in Glendale, California, DineEquity, Inc. (NYSE: DIN), through its subsidiaries, franchises restaurants under both the Applebee's Neighborhood Grill & Bar and IHOP brands. With more than 3,700 restaurants combined in 19 countries and approximately 400 franchisees, DineEquity is one of the largest full-service restaurant companies in the world. For more information on DineEquity, visit the Company's website located at www.dineequity.com.

Forward-Looking Statements

Statements contained in this press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by words such as "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. 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. These factors include, but are not limited to: the effect of general economic conditions; the Company's indebtedness; risk of future impairment charges; trading volatility and the price of the Company's common stock; the Company's results in any given period differing from guidance provided to the public; the highly competitive nature of the restaurant business; the Company's business strategy failing to achieve anticipated results; risks associated with the restaurant industry; risks associated with locations of current and future restaurants; rising costs for food commodities and utilities; shortages or interruptions in the supply or delivery of food; ineffective marketing and guest relationship initiatives and use of social media; changing health or dietary preferences; our engagement in business in foreign markets; harm to our brands' reputation; litigation; fourth-party claims with respect to intellectual property assets; environmental liability; liability relating to employees; failure to comply with applicable laws and regulations; failure to effectively implement restaurant development plans; our dependence upon our franchisees; concentration of Applebee's franchised restaurants in a limited number of franchisees; credit risk from IHOP franchisees operating under our previous business model; termination or non-renewal of franchise agreements; franchisees breaching their franchise agreements; insolvency proceedings involving franchisees; changes in the number and quality of franchisees; inability of franchisees to fund capital expenditures; heavy dependence on information technology; the occurrence of cyber incidents or a deficiency in our cybersecurity; failure to execute on a business continuity plan; inability to attract and retain talented employees; risks associated with retail brand initiatives; failure of our internal controls; and other factors discussed from time to time in the Company's Annual and Quarterly Reports on Forms 10-K and 10-Q and in the Company's other filings with the Securities and Exchange Commission. The forward-looking statements contained in this release are made as of the date hereof and the Company assumes no obligation to update or supplement any forward-looking statements.

Non-GAAP Financial Measures

This news release includes references to the Company's non-GAAP financial measure "adjusted net income available to common stockholders (Adjusted EPS)" and "Adjusted free cash flow." "Adjusted EPS" is computed for a given period by deducting from net income or loss available to common stockholders for such period the effect of any closure and impairment charges, any gain or loss related to debt extinguishment, any intangible asset amortization, any non-cash interest expense, any gain or loss related to the disposition of assets, and other items deemed not reflective of current operations. This is presented on an aggregate basis and a per share (diluted) basis. "Adjusted free cash flow" for a given period is defined as cash provided by operating activities, plus receipts from notes and equipment contracts receivable, less capital expenditures. Management uses adjusted free cash flow in its periodic assessments of, among other things, the amount of cash dividends per share of common stock and repurchases of common stock and we believe it is important for investors to have the same measure used by management for that purpose. Adjusted free cash flow does not represent residual cash flow available for discretionary purposes. Management may use certain of these non-GAAP financial measures along with the corresponding U.S. GAAP measures to evaluate the performance of the business and to make certain business decisions. Additionally, adjusted EPS is one of the metrics used in determining payouts under the Company's annual cash incentive plan. Management believes that these non-GAAP financial measures provide additional meaningful information that should be considered when assessing the business and the Company's performance compared to prior periods and the marketplace. Adjusted EPS and adjusted 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 U.S. GAAP.

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Contacts:

Ken Diptee
Executive Director
Investor Relations
DineEquity, Inc.
818-637-3632

Patrick Lenow
Media Relations
Vice President, Communications
DineEquity, Inc.
818-637-3122

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SOURCE DineEquity, Inc.

About Dine Brands Global, Inc.

Based in Glendale, California, Dine Brands Global, Inc. (formerly DineEquity, Inc.) (NYSE: DIN), through its subsidiaries, franchises restaurants under the Applebee's Neighborhood Grill & Bar and IHOP brands.

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