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| DIN > SEC Filings for DIN > Form 10-Q on 28-Oct-2009 | All Recent SEC Filings |
28-Oct-2009
Quarterly Report
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements in certain circumstances. This report contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). These statements are forward-looking and are subject to risks and uncertainties, so actual results may vary materially from those expressed or implied by any forward-looking statements. You can identify these forward-looking statements by words such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading "Risk Factors" in our most recent Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the U.S. Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.
Overview
The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Except where the context indicates otherwise, the words "we," "us," "our" and the "Company" refer to DineEquity, Inc., together with its subsidiaries that are consolidated in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
The Company was incorporated under the laws of the State of Delaware in 1976.
The first International House of Pancakes ("IHOP") restaurant opened in 1958 in
Toluca Lake, California. Shortly thereafter the Company's predecessor began
developing and franchising additional restaurants. In November 2007, the Company
completed the acquisition of Applebee's International, Inc. ("Applebee's"),
which became a wholly-owned subsidiary of the Company. Through various IHOP and
Applebee's subsidiaries we own, operate and franchise two restaurant concepts in
the casual dining and family dining categories of the food service industry:
Applebee's Neighborhood Grill and BarŪ and IHOP. Dine Equity, Inc. is the
ultimate parent of the IHOP and Applebee's subsidiaries. References herein to
Applebee's and IHOP restaurants are to these two restaurant concepts, whether
operated by franchisees or the Company. References herein to "system sales"
include retail sales at restaurants that are owned by franchisees and area
licensees and are not attributable to the Company. With more than 3,400
franchised or owned-and-operated restaurants combined, we are the largest
full-service restaurant company in the world.
Restaurant Concepts
Applebee's
We franchise and operate restaurants in the bar and grill segment of the casual dining industry under the name "Applebee's Neighborhood Grill & BarŪ." With 2,002 system-wide restaurants as of September 30, 2009, Applebee's Neighborhood Grill & Bar is the largest casual dining concept in the world, in terms of number of restaurants and market share.
Generally, Applebee's franchise arrangements consist of a development agreement and separate franchise agreements for each franchised restaurant. Development agreements grant to the franchise developer the exclusive right to develop Applebee's restaurants in a designated geographic area over a specified period of time. The term of a domestic development agreement is generally 20 years. The development agreement typically provides for an initial development schedule of one to five years, as agreed upon by the Company and the franchisee. At or shortly prior to the completion of the initial development schedule or any subsequent development schedule, the Company and the franchisee generally agree upon supplemental development schedules providing for the development of additional Applebee's restaurants in the franchise developer's exclusive territory.
Prior to the opening of each new Applebee's restaurant, the franchisee and the Company enter into a separate franchise agreement for that restaurant. Our standard franchise agreement has a term of 20 years and permits renewals for up to an additional 20 years upon payment of an additional franchise fee. Our current standard franchise arrangement calls for an initial franchise fee of $35,000 and a royalty fee equal to 4% of the restaurant's monthly net sales. We have agreements with a majority of our franchisees for Applebee's restaurants opened before January 1, 2000, which provide for a royalty rate of 4% and extend the initial term of the franchise agreements until 2020. The terms, royalties and advertising fees under a limited number of franchise agreements and other franchise fees under older development agreements vary from the currently offered arrangements.
We currently require domestic franchisees of Applebee's restaurants to contribute 2.75% of their gross sales to a national advertising fund and to spend at least 1% of their gross sales on local marketing and promotional activities. Under most Applebee's franchise agreements, we have the ability to increase the amount of the required combined contribution to the national advertising fund and the amount required to be spent on local marketing and promotional activities to a maximum of 5% of gross sales.
Since the completion of the Applebee's acquisition on November 29, 2007, we have been pursuing a strategy which contemplates transitioning from our current 80% franchised system to an approximately 98% franchised system. Between November 29, 2007 and September 30, 2009 we have franchised 110 company-owned restaurants in the California, Nevada, Delaware, Texas and
New Mexico markets. This heavily franchised business model is expected to require less capital investment and reduce the volatility of cash flow performance over time. A range of factors, including the overall market for restaurant franchises, the availability of financing and the financial and operating performance of Applebee's company-owned restaurants, can impact the likelihood and timing of the completion of this strategy as well as the ultimate proceeds the Company will receive from franchising the company-operated restaurants. The Company continues to monitor these factors and to assess their impact on possible franchise transactions. The Company may choose to suspend or revise its franchising strategy if it does not believe that conditions will lead to satisfactory proceeds from the sale of its company-operated restaurants.
IHOP
Under our current business model (the "Current Business Model"), which was adopted in January 2003, a potential franchisee first negotiates and enters into a single-store development agreement or a multi-store development agreement with the Company and, upon completion of a prescribed approval procedure, is primarily responsible for the development and financing of one or more new IHOP franchised restaurants. In general, we do not provide any financing with respect to the franchise fee or otherwise. The franchise developer uses its own capital and financial resources along with third party financial sources to purchase or lease a restaurant site, build and equip the business and fund its working capital needs. The principal terms of the franchise agreements entered into under the Company's business model prior to 2003 (the "Previous Business Model") and the Current Business Model, including the franchise royalties and the franchise advertising fees, are substantially the same except with respect to the terms relating to the franchise fee.
The revenues received by the Company from a typical franchise development
arrangement under the Current Business Model include (a) (i) a location fee
equal to $15,000 upon execution of a single-store development agreement or
(ii) a development fee equal to $20,000 for each IHOP restaurant that the
franchisee contracts to develop upon execution of a multi-store development
agreement; (b) a franchise fee equal to (i) $50,000 (against which the $15,000
location fee will be credited) for a restaurant developed under a single-store
development agreement or (ii) $40,000 (against which the $20,000 development fee
will be credited) for each restaurant developed under a multi-store development
agreement, in each case, paid upon execution of the franchise agreement;
(c) franchise royalties equal to 4.5% of weekly gross sales; (d) revenue from
the sale of pancake and waffle dry-mixes; and (e) franchise advertising fees.
IHOP franchised restaurants established prior to 2003 under the Previous Business Model were generally developed by the Company. The Company was involved in all aspects of the development and financing of the restaurants. Under the Previous Business Model, the Company typically identified and leased or purchased the restaurant sites for new company-developed IHOP restaurants, built and equipped the restaurants and then franchised them to franchisees. In addition, IHOP typically financed as much as 80% of the franchise fee for periods ranging from five to eight years and leased the restaurant and equipment to the franchisee over a 25-year period.
The revenues received from a restaurant franchised under the Previous Business
Model include: (a) the franchise fee, a portion of which (typically 20%) was
paid upon execution of the franchise agreement; (b) interest income from the
financing arrangements for the unpaid portion of the franchise fee under the
franchise notes; (c) franchise royalties typically equal to 4.5% of weekly gross
sales; (d) lease or sublease rents for the restaurant property and building;
(e) rent under an equipment lease; (f) revenues from the sale of pancake and
waffle dry-mixes; and (g) franchise advertising fees.
The franchise agreements generally provide for advertising fees comprised of
(i) a local advertising fee generally equal to 2.0% of weekly gross sales under
the franchise agreement, which was usually collected by us and then used to
cover the cost of local media purchases and other local advertising expenses
incurred by a local advertising cooperative, and (ii) a national advertising fee
equal to 1.0% of weekly gross sales under the franchise agreement. Area
licensees generally pay lesser amounts toward advertising. Beginning in 2005,
the Company and the IHOP franchisees agreed to reallocate portions of the local
advertising fees to purchase national broadcast, syndication and cable
television time in order to reach our target audience more frequently and more
cost effectively. In a few instances, we have agreed to accept reduced royalties
and/or lease payments from franchisees or have provided other accommodations to
franchisees for specified periods of time in order to assist them in either
establishing or reinvigorating their businesses.
The following table summarizes Applebee's restaurant development and franchising activity:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(unaudited)
Applebee's Restaurant Development
Activity
Beginning of period 1,992 1,993 2,004 1,976
New openings
Company-developed - - - 1
Franchise-developed 13 7 23 34
Total new openings 13 7 23 35
Closings
Company - - - (3 )
Franchise (3 ) (3 ) (25 ) (11 )
End of period 2,002 1,997 2,002 1,997
Summary-end of period
Franchise 1,603 1,517 1,603 1,517
Company 399 480 399 480
Total 2,002 1,997 2,002 1,997
Restaurant Franchising Activity
Domestic franchise-developed 5 6 12 23
International franchise-developed 8 1 11 11
Refranchised 2 29 7 29
Total restaurants franchised 15 36 30 63
Closings
Domestic franchise (3 ) (2 ) (21 ) (9 )
International franchise - (1 ) (4 ) (2 )
Total franchise closings (3 ) (3 ) (25 ) (11 )
Net addition 12 33 5 52
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The increase in Applebee's franchise closings in 2009 was due primarily to the closing of seven restaurants after the franchise agreements were terminated due to nonpayment of royalties and advertising fees. One of the seven restaurants re-opened under new ownership in 2009, and the Company expects two additional restaurants to re-open under new ownership in 2010. Another reason for the increase was six of the restaurants closed in 2009 were originally planned to be closed in 2008.
The following table represents Applebee's restaurant development commitments for 2009 and 2010. We have disclosed development commitments for only a two-year period as the Applebee's development agreements generally provide for a series of two-year development commitments after the initial development period.
Contractual
Opening of
Restaurants by Year
2009 2010
Domestic development agreements 19 15
International development agreements 23 18
42 33
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In 2009, we expect franchisees to open a total of 28 to 33 new Applebee's restaurants including 16 to 18 domestic franchise restaurants and 12 to 15 international franchise restaurants. We currently do not plan to open any domestic company-operated restaurants. The actual number of openings may differ from our expectations due to various factors, including economic conditions, operating performance of existing restaurants, franchisee access to capital and the impact of currency fluctuations on our international franchisees. The timing of new restaurant openings may also be affected by various factors including weather-related and other construction delays and difficulties in obtaining regulatory approvals.
The following table summarizes IHOP restaurant development and franchising activity:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(unaudited)
IHOP Restaurant Development Activity
Beginning of period 1,421 1,361 1,396 1,344
New openings
Company-developed - - - -
Franchise-developed 12 18 43 43
Area license 1 1 4 2
Total new openings 13 19 47 45
Closings
Company - - - (1 )
Franchise (1 ) (5 ) (8 ) (11 )
Area license - - (2 ) (2 )
End of period 1,433 1,375 1,433 1,375
Summary-end of period
Franchise 1,260 1,205 1,260 1,205
Company 11 13 11 13
Area license 162 157 162 157
Total 1,433 1,375 1,433 1,375
Restaurant Franchising Activity
Domestic franchise-developed 11 17 39 41
International franchise-developed 1 1 4 2
Refranchised - 1 1 10
Total restaurants franchised 12 19 44 53
Closings
Domestic franchise (1 ) (5 ) (8 ) (10 )
International franchise - - - (1 )
Total franchise closings (1 ) (5 ) (8 ) (11 )
Reacquired by the Company - (4 ) (1 ) (13 )
Net addition 11 10 35 29
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As of the beginning of 2009, we had signed commitments from franchisees to build 307 IHOP restaurants over the next nine years plus options for an additional 111 restaurants, comprised as follows:
Contractual Openings of
Restaurants by Year
Number of
Signed
Agreements 2012 and
at 12/31/08 2009 2010 2011 thereafter Total
Single-store development
agreements 18 12 5 1 - 18
Multi-store development
agreements 80 74 55 43 165 337
International
development agreements 7 8 6 5 44 63
105 94 66 49 209 418
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In 2009, a total of 65 to 75 new IHOP restaurants are expected to open, consisting of 55 to 60 franchise restaurants, three to five area license restaurants in Florida, two to three domestic restaurants in non-traditional channels and five to seven restaurants outside the U.S. The actual number of openings in any period may differ from the number of signed commitments. Historically, the actual number of restaurants developed in a particular year has been less than the total number committed to be developed due to various factors including weather-related delays, other construction delays, difficulties in obtaining timely regulatory approvals and various economic factors, including operating performance of existing restaurants and franchisee access to capital financing.
Restaurant Data
The following table sets forth, for the three-month and nine-month periods ended September 30, 2009 and 2008, the number of effective restaurants in the Applebee's and IHOP systems and information regarding the percentage change in sales at those restaurants compared to the same periods in the prior year. "Effective restaurants" are the number of restaurants in a given period, adjusted to account for restaurants open for only a portion of the period. Information is presented for all effective restaurants in the IHOP and Applebee's systems, which includes restaurants owned by the Company, as well as those owned by franchisees and area licensees. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. However, we believe that presentation of this information is useful in analyzing our revenues because franchisees and area licensees pay us royalties and advertising fees that are generally based on a percentage of their sales, as well as rental payments under leases that are usually based on a percentage of their sales. Management also uses this information to make decisions about future plans for the development of additional restaurants as well as evaluation of current operations.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(unaudited)
Applebee's Restaurant Data
Effective restaurants(a)
Franchise 1,598 1,513 1,592 1,487
Company 399 481 402 501
Total 1,997 1,994 1,994 1,988
System-wide(b)
Sales percentage change(c) (6.3 )% (1.5 )% (4.2 )% 0.6 %
Domestic same-store sales percentage
change(d) (6.5 )% (3.1 )% (4.5 )% (1.4 )%
Franchise(b)(e)
Sales percentage change(c)(g) (1.0 )% 1.2 % 2.3 % 1.6 %
Same-store sales percentage change(d) (6.2 )% (3.1 )% (4.4 )% (1.6 )%
Average weekly domestic unit sales
(in thousands) $ 42.9 $ 45.7 $ 46.3 $ 48.4
Company
Sales percentage change(c)(g) (22.7 )% (9.3 )% (23.9 )% (2.3 )%
Same-store sales percentage change(d) (7.6 )% (3.1 )% (5.1 )% (0.6 )%
Average weekly domestic unit sales
(in thousands) $ 39.0 $ 41.9 $ 41.9 $ 44.3
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(unaudited)
IHOP Restaurant Data
Effective restaurants(a)
Franchise 1,251 1,190 1,237 1,183
Company 11 10 11 10
Area license 162 157 160 157
Total 1,424 1,357 1,408 1,350
System-wide(b)
Sales percentage change(c) 3.8 % 3.8 % 4.3 % 6.1 %
Domestic same-store sales
percentage change(d) (1.1 )% 0.2 % 0.2 % 2.2 %
Franchise(b)(e)
Sales percentage change(c) 4.2 % 4.3 % 4.8 % 6.7 %
Same-store sales percentage
change(d) (1.1 )% 0.3 % 0.1 % 2.2 %
Average weekly unit sales (in
thousands) $ 35.1 $ 35.4 $ 35.6 $ 35.5
Company(f) n.m. n.m. n.m. n.m.
Area License(h)
Sales percentage change(c) (0.7 )% 0.7 % (0.4 )% 2.1 %
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(b) "System-wide sales" are retail sales at IHOP and Applebee's restaurants operated by franchisees and IHOP restaurants operated by area licensees, as reported to the Company, in addition to retail sales at company-operated restaurants. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company.
(c) "Sales percentage change" reflects, for each category of restaurants, the percentage change in sales in any given fiscal period compared to the prior fiscal period for all restaurants in that category.
(d) "Same-store sales percentage change" reflects the percentage change in sales, in any given fiscal period compared to the prior fiscal period, for restaurants that have been operated throughout both fiscal periods that are being compared and have been open for at least 18 months. Because of new unit openings and store closures, the restaurants open throughout both fiscal periods being compared may be different from period to period. Same-store sales percentage change does not include data on IHOP restaurants located in Florida.
(e) IHOP franchise restaurant sales were $570.9 million and $547.7 million for the three months ended September 30, 2009 and 2008, respectively, and $1,717.2 million and $1,638.1 million for the nine months ended September 30, 2009 and 2008, respectively. Applebee's franchise restaurant sales were $818.7 million and $827.3 million for the three months ended September 30, 2009 and 2008, respectively, and $2,645.0 million and $2,584.9 million for the nine months ended September 30, 2009 and 2008, respectively.
(f) Sales percentage change and same-store sales percentage change for IHOP company-operated restaurants are not meaningful due to the relatively small number and test-market nature of the restaurants, along with the periodic inclusion of restaurants reacquired from franchisees that are temporarily operated by the Company.
(g) The sales percentage change for Applebee's franchise and company-operated restaurants is impacted by the franchising of 103 company-operated restaurants during 2008 and seven company-operated restaurants in 2009.
(h) Sales at IHOP area license restaurants were $51.6 million and $52.0 million for the three months ended September 30, 2009 and 2008, respectively, and $162.6 million and $163.3 million for the nine months ended September 30, 2009 and 2008, respectively.
Significant Known Events, Trends or Uncertainties Impacting or Expected to . . .
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