Dine Brands Global, Inc. (NYSE:DIN) Q2 2023 Earnings Call Transcript

Dine Brands Global, Inc. (NYSE:DIN) Q2 2023 Earnings Call Transcript August 3, 2023

Dine Brands Global, Inc. beats earnings expectations. Reported EPS is $1.82, expectations were $1.53.

Operator: Good morning, and welcome to Dine Brands Global’s Second Quarter 2023 Conference Call. I’m Brett Levy, Dine’s Vice President of Investor Relations and Treasury. This morning’s call will include prepared remarks from John Peyton, CEO; and Vance Chang, CFO. Following those prepared remarks, Tony Moralejo, President of Applebee’s; and Jay Johns, President of IHOP, will also be available to address questions from the investment community during the portion of the call. Please remember our safe harbor regarding forward-looking information. During the call, management will discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors, which may cause the actual results to be different than those expressed or implied.

Please evaluate the forward-looking information in the context of these factors, which are detailed in today’s press release and 10-Q filing. The forward-looking statements are as of today and no obligation to update or supplement these statements. We will also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brand’s Investor Relations website. For calendar planning purposes, we are tentatively scheduled to release our Q3 2023 earnings before the market open on November 1, 2023. With that, it is my pleasure to turn the call over to Dine Brands CEO, John Peyton.

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John Peyton: Thanks, and good morning, everyone, and thanks for joining us. Today, we’ll provide updates on Dine’s Q2 results, our investment initiatives and progress on new unit development. Vance will provide a more detailed financial update, including balance sheet progress, and Tony and Jay will join us for Q&A on the back half of our call. So I’ll begin today with a few comments about the mindset and behavior of our consumer. We’ve spoken at length about the remarkable resilience of our target guest in 2022 and early 2023. In late Q1, we began to see some hints that our guests were growing a bit more cautious in their spending. This continued into the second quarter as the percentage of guests selecting from limited time offerings and the value offerings on our Applebee’s menu grew from approximately 15% to 19% quarter-over-quarter.

And across the industry, we noticed our competition leaning heavily into promotions, which also contributed to the headwinds this quarter. Yet, while we saw a slight decline in traffic, average check remained consistent year-to-date, just the consumers are more likely to cut back on restaurant visits, then trade down to a less expensive alternative to fight inflation. And finally, while our off-premise sales volume remains strong, we saw a shift in mix from delivery to pickup, a deliberate decision to avoid extra cost associated with delivery and fees. All of this indicates that the pandemic reopening boom of 2022 may now be returning to historically normal and more sustainable levels. Turning to our results. Our performance reflected a modest slowdown when looking at comparable year-over-year same-store sales, driven primarily by traffic, and this relates in particular to Applebee’s.

You may recall Applebee’s Q2 2022 results were heavily influenced by pent up demand from Omicron, which fueled Q2 sales growth. However, it’s worth noting that our current quarter’s average weekly sales remain stable and are roughly 12% above pre-pandemic levels. That said, here are the highlights from the quarter, which I provide more details on in a moment. Q2 revenue excluding the refranchised Applebee’s restaurants grew to $206 million from $198 million and adjusted EB grew 2% to over $67 million. IHOP posted its ninth consecutive quarter of comp sales growth of 2.1% increase year-over-year. Applebee’s same-store sales declined 1% in Q2 influenced, as I mentioned, by strong sales volumes last year. Importantly, though, average weekly sales for Applebee’s was over $54,000 and average weekly sales for IHOP was approximately $39,000.

And we’re encouraged to see that average weekly sales for both Applebee’s and IHOP were above 2019 levels. Now we continue to advance our strategic growth agenda, which includes investments across enhanced technology, marketing and training tools, all needed to provide the overall guest experience and our loyalty programs. This includes a robust technology that introduces a new POS for IHOP and Applebee’s server handhelds Flybuy and functionality for our apps with enhanced capabilities for Dine in order in advance joining wait lists for seating and different payment options and reviews. Second, we are investing and engaging in relevant menu and marketing innovations to drive comp sales growth. For example, we’ll continue to build IHOP’s portfolio of virtual brands and leverage IHOP’s brand equity into national consumer packaged goods ups.

And finally, continued investments in new development initiatives such as new brick and mortar concepts like dual branded restaurants, conversions, and new restaurant prototypes, as well as offering compelling financial incentives for franchisees to accelerate the construction of new restaurants. So now turning to Applebee’s. As I mentioned at the start, comp sales were down 1% due to traffic trends, difficult comps, and a slightly more hesitant consumer. Nevertheless, Applebee’s continues to quality food and a better guest experience, allowing them to maintain sustained sales volume. Despite the increasingly competitive and promotional environment, Applebee’s system-wide AUVs are approaching $3 million this quarter. Agility was the key to the quarter and will continue to be important going forward.

For example, the brand responded to initial signs of consumer softness by elevating its everyday value platform of two for $25 to include a premium offer with stake, which helped drive improvements to both and traffic. And Applebee’s summer partnership with Disney, Lucasfilm in Fandango to promote the latest installment of the Indiana Jones franchise is a great example of the brand’s excellence in non-traditional marketing. Now an update on Applebee’s development. Under Tony’s leadership, we are executing a three-part plan. First, we’ve taken a fresh look at underperforming restaurants and ways in which we can improve profitability, leading to some additional closures. These closures were based on a number of – including some older restaurants or areas becoming unsustainable due to changes across trading area dynamics in a post-COVID world.

However, we’re still looking into opportunities to relocate some of these underperforming restaurants. Second, the brand is finding success in conversions in recent new builds. Average unit volumes for the class of 2022 restaurant openings are annualizing at nearly $4 million, well above the brand’s average of nearly $3 million, reflecting the compelling relevance of the brand, when it’s in the right market. Finally and most importantly, we continue to work on a smarter, more efficient design that we plan to unveil next year. This prototype will incorporate the post-pandemic business model and operations efficiencies and will address the inflation in the cost to build a new restaurant. In the meantime, we continue to work on improving store level margins, which is of keen interest to developers working together Applebee’s, our franchisees and CSCS, our brand’s purchasing cooperative have made progress toward our reputability initiative and during the quarter we implemented 50 basis points of annualized savings and the work continues.

Applebee’s competes in an increasingly competitive segment of the restaurant space and it continues to lead in value, affordability, and brand awareness. These are attributes that have been built and nurtured over the past decade and underpin the brand’s resilience and ongoing appeal to its loyal guests. Moving on to IHOP. It continued its momentum in Q2 reporting its ninth consecutive same-store sales growth. And IHOP is delivering on its renewed focus on innovation, particularly around its menu, consumer products and technology. So first, starting with menu innovation. In Q2, IHOP launched its largest menu refresh in many years, which includes eggs Benedict sweet and savory crepes and other items. All the changes were driven by extensive customer research in which guests told us they want more breakfast favorites, fresh ingredients and great value.

New menu leans into our expertise in breakfast and introduces new items and flavors that guests and families crave at any time of the day. Since our launch in April and initial promotional activities, these new items have maintained sales volumes, which signals sustained demand. This innovation continued into Q3 with IHOP’s latest LTO Pancake Tacos, which is a testament to the brand’s creativity, and we’ve just begun to celebrate IHOP’s 65th anniversary featuring all you can eat pan for $5 and kids eat free. As we look to the back half of the year, we have a full pipeline of marketing and menu activations to roll out, including a mix of new menu innovations and value offerings. IHOP remains bullish on virtual brands, which allow us to leverage our scale and kitchen space to add incremental sales.

Our target windows are dinner and late night hours, and we have several exciting brands coming very soon. During the quarter, we launched IHOP branded coffee at grocery and retailers in partnership with Kraft Heinz, IHOP coffee achieved national distribution across more than 25,000 retail locations. We are pleased with the initial sales performance and Kraft Heinz will continue to invest in comprehensive media support and retailer campaigns through year-end. IHOP’s loyalty program, the International Bank of Pancakes continues to be an important channel to connect with guests and now has almost 6.5 million members, which accounts for approximately [indiscernible] of sales. IHOP continued with its restaurant profitability initiative and during the quarter identified 35 basis points of annualized savings and the work to identify additional savings continues.

And finally, as we’ve discussed in previous quarters, development is an important growth engine for the IHOP brand. At the end of Q2, roughly three quarters of our 2023 domestic openings are conversions in line or end caps, and our openings have spanned across more than a dozen and franchisees. While we’re not reporting on Fuzzy financial results quite yet, I’d like to share a few highlights about Fuzzy’s from the quarter. First, one of the most compelling reasons for acquiring Fuzzy’s is that we believed it would appeal to our existing franchisees and that their interest would accelerate development. To that end, last month, the Fuzzy’s team executed a 20 restaurant development deal with one of our largest IHOP franchisees. In addition, one of our Fuzzy’s franchisees purchasing Applebee’s portfolio.

Since our acquisition in December, the Fuzzy’s pipeline continues to grow fueled by both our existing franchisees and the recruitment of new developers. Second, we continue to be impressed by the team’s marketing and menu innovation prowess. For example, Fuzzy Cinco de Mayo celebration, an important holiday for the brand posted a 19% increase in year-over-year sales and we’re very pleased with the progress Fuzzy’s has achieved in seamlessly integrating in system. And finally, moving on to our international business. We continue to focus on opportunities in our core international markets, Puerto Rico and the Caribbean, Latin America, the Middle East, and Canada. During the quarter, we signed a multi-unit IHOP development deal in Central America.

Last quarter, we shared that we opened our first ever dual branded Applebee’s IHOP location in the Middle East in Dubai and this model is proving to be a success in its first few months of operation. Since then, we’ve added three more dual branded units in the Middle East and we expect to have approximately six to eight open by the end of the year. We’re proving that dual branded restaurants present compelling benefits like having a shared kitchen that allows for more efficient staffing and most importantly, consistent sales across all four-day parts due to the complementary business periods of the two brands. We’re also making progress with our ghost kitchen development plans. Ghost kitchens are an efficient, innovative, and low capital way brands and licensed partners to enter new markets.

We expect to open approximately 30 new distribution points by end of year, bringing our global ghost kitchen total to over 80 and we’ve recently signed agreements to bring our brands to new markets including Spain, Columbia, and Japan, which we expect all to be active by year-end. To wrap up, while we saw a somewhat more hesitant guest during the quarter, our brands and our asset-light model proved to be resilient. We’re encouraged by the progress we’ve made over the years and we’re ready to adapt to the changing climate with new menus, updated technology, clever and compelling marketing, and new sources of revenue. And so now I’ll turn it over to Vance.

Vance Chang: Thank you, John. As you have all just heard, we had a mixed quarter in terms of comp sales, but despite this, our restaurants are generating consistent average weekly sales volume above our pre-pandemic levels. On the top line, consolidated total revenues, including the refranchise Applebee’s restaurants increased to over $206 million in Q2 versus $198 million in the prior year. Our total revenues reflected strong franchise revenues, which grew 5.7% to $177.9 million compared to $168.3 million for the same quarter of 2022. The improvement was due to comp sales growth at IHOP and the inclusion of Fuzzy’s Taco Shop. If we exclude advertising revenues, franchise revenues actually increased 8.3%. Rental segment revenues for the second quarter of 2023 improved by 1.3% to $29.4 million compared to $29.1 million for the same quarter of 2022.

The rental segment margin remained flat. Our company restaurant operations sales were approximately $0.5 million for the second quarter, compared to $39.5 million for the same period of last year. This decrease was mainly due to the refranchising of our Applebee’s company operated restaurants in October of 2022, offset by contributions from three Fuzzy’s company operated restaurants, two of which we also refranchised during the quarter. G&A expenses increased nearly 9% to $47.9 million in Q2 of 2023, up from $44 million [ph] in the same period last year, mostly due to one-time costs associated with IHOP’s Flip’d initiative. Excluding IHOP Flip’d cost of $3.3 million, G&A was consistent with the prior year period. Adjusted EBITDA for Q2 of 2023 increased to $67.3 million from $66.1 million in Q2 of 2022, which also was with the prior year period.

Adjusted diluted EPS for the second quarter of 2023 was a $1.82 compared to adjusted diluted EPS of $1.65 for the same period of 2022. Turning to the statement of cash flows. We had adjusted free cash flow of $24 million for the first half of 2023, compared to $23 million for the same period of last year. Cash provided by – for the first half of 2023 was $43 million, compared to cash provided from operations of roughly $30 million for the same period of 2022. The variance in operations cash flow was primarily due to a favorable change in working capital resulting from changes to bonus payments, and the timing of disbursements. CapEx for the first half of 2023 was $23 million, compared to nearly $13 million for the same period 2022. We finished the second quarter with total unrestricted cash of $98 million, compared with unrestricted cash of $182 million at the end of the first quarter, as we utilize our balance sheet to lower our outstanding debt balance with the issuance of our $500 million 2023 A-2 securitization.

Additionally, we continue to return capital to equity and bond investors through dividends and purchases as well as debt paydown. Altogether, we return over $180 million of capital back to equity and bond investors in the first half of 2023. This demonstrates Dine’s prudent capital allocation strategy with high cash flow generation ability. Turning to Applebee’s performance. Q2 was a more volatile quarter in terms of comp sales as we compared against strong pent-up demand after omicron line of 2022. However, as John mentioned earlier, Applebee’s sales results have remained steady, and our average weekly sales were above pre pandemic levels at over $54,000, including over $12,000 from off premise. That’s roughly 23% of total sales, of which 11% is from to-go, and 12% is from delivery.

IHOP sales results were also consistent throughout the quarter. Average weekly sales were roughly $39,000, around 6% above 2019 levels, including over $8,000 from off-premise sales. That’s over 20% of total sales, of which 7% is from to-go, and 13% is from delivery. Along with the sales results, our franchisees are reporting that the labor situation has improved as workers return to the restaurants and labor shortages are reduced. Continue movement [ph] is expected by our franchisees, and this gives us confidence in the overall improvement of their operating conditions. Franchisees should also see benefits to their food cost. The second half of 2023 is expected to turn deflationary for both brands. Applebee’s commodity basket is estimated to be over 1.5% cheaper versus last year.

An IHOP’s basket is expected to be over 3% cheaper in cost year-over-year. With the overall commodity outlook turning favorable for both brands, our supply chain co-op is now expecting a full year commodity outlook in the flat to low single digits range, further reduced from a low to mid single digit range previously expected. Along with these macro level improvements, our system is working on other ways to drive productivity and profitability for our franchisees, as mentioned by John earlier. These are not limited to better pricing, but include the potential to reduce waste, improve packaging, and help our system optimize labor. We’re confident in our ability to deliver on our long-term priorities, but a still challenge backdrop will continue to impact our operations in the near term and has led us to make an adjustment in Applebee’s development guidance for 2023.

As John mentioned earlier, we’ve taken a closer look at underperforming restaurants as the new Applebee’s development and leadership team continues to refine its prototype and work on relocating the remaining restaurants impacted by local market changes. As results we’re now expecting 25 to 35 net fewer Applebee’s locations in 2023, down from 10 to 20 net fewer locations previously expected. The rest of our guidance stays unchanged. We remain focused on driving and supporting long-term and our franchise community while optimizing our balance sheet and returning capital to our shareholders. So now I’ll hand the call back to John for some closing remarks before we open it up for Q&A. John?

John Peyton: Thanks so much, Vance. We’ll now hand the call over to the operator. And as a reminder, Jay and Tony are both on the line and along with me and Vance, they’re here to answer your questions. So operator, please open up the queue and we can begin the Q&A session now.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Eric Gonzalez with KeyBanc. Please proceed.

Eric Gonzalez: Hey, thanks. Good morning. John, in the prepared remarks, you touched on some of the macro challenges you faced at the end of the first quarter, at the start the second quarter. From an industry perspective, it seemed like some of those headwinds may have abated as the quarter progressed. And I’m guessing you saw similar improvement in your business in May and June versus April. So maybe you could speak to where we are today? Has the operating environment changed at all or was the improvement mostly due to easier comparisons such that as we get into the fall it might become more of a challenge? Thanks.

John Peyton: Hey, Eric. Good morning. Thanks for everyone for joining and thanks our operator for taking care of us so well. Yes, I mean, as you know Eric, we don’t typically give month-to-month guidance, but what we – within the quarter but what I can tell you is that Applebee’s in particular was nimble and quickly reacted to what it saw in terms of a little bit of the soft traffic. We mentioned how they doubled down on their promotion activity, like adding stake to the two for 25 and see that made positive effect on traffic as the quarter progressed.

Eric Gonzalez: What about in terms of pricing, do you think maybe some of the traffic declines are related to some price increases or where do we stand in terms of pricing? And do you think that there’s an opportunity to lean more heavily into value or necessarily lean more heavily into value just because some of the pricing may have gotten out of whack with the consumer?

John Peyton: Yes, I’ll take that at a headline level, Eric, and then, pass it on to Tony and Jay for comments on the brand’s approaches to that. But at a time like this, when we see the consumer becoming more cautious, right? We are more focused than ever on traffic, and we do that by leaning into our reputation for value in both brands as well as the brand’s expertise in delivering value oriented POS and promotions. So I’ll ask Tony, if you want to talk a little bit about Applebee’s strategy going forward, and Jay, if you have anything to add, you can do the same.

Tony Moralejo: Yes, happy to, John. Hi Eric. As John said, we don’t traditionally talk in detail about traffic, but it’s obviously something we monitor closely. What I will say about traffic and the decline in Q2 is that it stems primarily from the macroeconomic environment. And when I look back at 2022 and in the first two quarters of this year’s, our franchisees, in terms of pricing, they’ve been very modest, especially relative to the category to mitigate the traffic pressure and while at the same time protecting and recovering their margins. So they’ve been very prudent. And as inflation moderates, right as we expect some favorability in our basket in the balance of the year as disposable income improves and then it improves, we’re going to – you’ll find that we’ll be very well positioned to capture more share.

Jay Johns: Hey, Eric. This is Jay. Just to add to that. We have a strategy at IHOP really to make sure that it includes value and innovation. We just rolled out new core menu, we’ve had full price eggs Benedicts, for example, as we rolled that out. So that’s a more of an innovation item right now. Currently all you can eat pancakes and kids eat free. So we pulse those things throughout the year to make sure we’re highlighting the great new items on our core menu and the innovation that we have, and also being mindful of value and we think that helps us overcome whatever headwinds we might get from any kind of pricing the franchisees may have done.

John Peyton: Yes. And Eric, the last thing, it’s John again, I’d mentioned is that stay tuned for Monday, Applebee’s is launching a return of a fan favorite value offer significant media behind it, and that’s an example of the brand reacting to market conditions in a very real time.

Eric Gonzalez: Sounds good. Thanks.

Operator: Thank you. One moment, please as I prepare the queue. Our next question comes from the line of Jake Bartlett from Truist Securities. Please proceed.

Jake Bartlett: Hi, thanks for taking the question. Mine is really about the approach to value. And I think there’s a general concern among the investment community is that the industry might kind of slip back into deep discounting. And so, I’m wondering how would you characterize the level of value now? And I think that the two for 25 with the stake whatever’s coming on Monday, it’s a bit like deep discounting. And I’m just wondering how you’d characterize, the level of discounting now, what you expect versus kind of some of the pre COVID levels, which were so margin destructive., I think just industrywide, just any comment would be helpful to start?