Dine Brands Global, Inc. (NYSE:DIN) Q1 2024 Earnings Call Transcript May 8, 2024

Dine Brands Global, Inc. misses on earnings expectations. Reported EPS is $1.17 EPS, expectations were $1.59. Dine Brands Global, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Dine Brands First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Matt Lee, Senior Vice President, Finance and Investor Relations. Please go ahead.

Matt Lee: Good morning. And welcome to Dine Brands Global's first quarter fiscal 2024 conference call. 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 Q&A 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 we assume no obligation to update or supplement these statements. We will refer to certain non-GAAP financial measures, which are described in our press release and available on Dine Brands' Investor Relations Web site. For calendar planning purposes, we are tentatively scheduled to release our Q2 2024 earnings before the market opens on August 7, 2024, and to host a conference call that morning to discuss the results. With that, it is my pleasure to turn the call over to Dine Brands' CEO, John Peyton.

John Peyton: Good morning, everyone. And thank you for joining us for our first quarter earnings call. Today, I'll share Dine's Q1 results and discuss trends in consumer behavior, and discuss operational highlights across our portfolio. I'll also provide an update on our development strategy. And then Vance will discuss our financial results and capital allocation plans in more detail. During the first quarter, like others in our industry, we saw large areas of the country experience poor weather impacting sales and traffic. And consumer caution with respect to economic conditions persisted in the post holiday period. As a result, the consumer has become more price sensitive as indicated by the response to our limited time promotions.

For example, at Applebee's 28% of our transactions were tied to a limited time offer or promotion, which was up from 19% in the previous quarter as well as the prior year. We also continue to see guests trade down from higher priced items at both IHOP and Applebee's, another indicator that guests are managing their wallet. Despite the volatile macro environment causing a slower start to 2024 than we anticipated, we are encouraged to see that our value driven strategy helped to mitigate some of the challenges in Q1 and importantly, drive sequential improvements throughout the quarter. Our approach was validated by guest response to our LTOs and enthusiastic reactions to our continued menu innovation and reinforced by strong marketing calendars and brand relevancy.

So with that, I'll walk through our key financial highlights, recognizing that we're comping over a strong Q1 2023. In Q1, our EBITDA was $60.8 million compared to $66.4 million in the same quarter last year. Revenues were down 3.5% for Q1. Applebee's reported a 4.6% reduction in comp sales, lapping last year's positive 6.1% Q1 comp sales growth. IHOP posted negative 1.7% comp sales, lapping a positive 8.7% increase in comp sales the same time last year. And adjusted free cash flow was $29.7 million, which was an increase of $27.5 million. Overall, despite the slow start to the year, we remain committed to our guidance for the full year. I'll turn now to highlights of Applebee's performance. In Q1, Applebee's results were impacted by challenges I referenced related to weather and consumer pullback after the holiday season.

However, the brand's performance steadily improved throughout the quarter, supported by effective marketing and promotional campaigns, which contributed to Applebee's outperforming Black Box traffic in Q1. Applebee's innovation pipeline was particularly strong in Q1 with three limited time offerings strategically spaced throughout the quarter that delivered on our focus of offering compelling value aligned with our brand promise, meeting the guest where they are and pairing the relevancy of our brands with important cultural moments. In January, we kicked off the New Year with our All You Can Eat promotion, which exceeded our expectations and outperformed All You Can Eat from the prior two years. In February, the Applebee's Date Night Pass launched just in time for Valentine's Day, offered guests over $1,500 in dining value for the unbeatable price of just $200.

It sold out within minutes, demonstrating the strong connection the brand holds with its guests. The Date Night Pass and the media coverage was outstanding, generating more than 2.4 billion impressions, and the social conversation on Applebee's and Date Night increased by more than 115%. Turning now to March. Following a national double blind taste test of our classic buffalo sauced boneless wings, Applebee's was crowned with the title of America's favorite boneless wings, and we leveraged this to spotlight the brand and draw guests to our restaurants. This was the basis of our national campaign that ran during March Madness where we offered guests $0.50 boneless wings. It was the first time we extended a disruptive value promotion also to be available via To Go, which resulted in improved off premise volumes while also maintaining a steady dine in business.

As we continue to look for new ways to reach our guests where they are, we're working to enhance our off premise offerings, and we're pleased to see initial success with our boneless wings. This dine in and off premise combination drove a strong finish to the quarter, outpacing Black Box 5 times in Q1, four of which were the last four weeks of the quarter, setting us up well for Q2. Our innovation pipeline is designed to drive steady cadence of exciting developments to showcase the brand and give guests more reasons to come back to Applebee's. Some highlights currently rolling out include the Whole Lotta Bacon Burger, which launched in April, our recently announced NFL sponsorship as the official grill and bar of the NFL, followed by the return of DOLLARITA just last week that features a new appetizer, our loaded chicken fries.

Also of note, since the launch of Applebee's new Web site and mobile app in December, we've seen the highest conversion rates of the last two years. In fact, we're seeing a higher percentage of guests choosing to place their orders digitally as well as higher check averages compared to our prior site and app. Applebee's performance improved throughout the quarter and we're encouraged by the continued positive momentum so far in Q2, supporting our guidance for the year. Now moving on to IHOP. While the top-line experienced a slight pullback for the first time in three years, we maintained a steady flow of timely relevant campaigns that helps offset the modest weather related headwinds, a tough comp rollover due to the closure of our virtual brand partner, Nextbite and the impact of the economic pressures our guests are facing.

Our strategy to focus on the guest experience, menu innovation and targeted marketing executed in a very nimble and creative way will allow us to deliver positive comps for the full year. We had a great run of sequential growth with 11 quarters of positive comps leading up to this quarter and we're confident we will return to that pattern. And now for a review of activity in the quarter. We started the year with the return of our guest favorite, Rooty Tooty Fresh 'N Fruity, featuring a new combo that allowed guests to customize their orders at a value price point of $7. As a result, IHOP's comp sales outperformed the Black Box Family Dining segment in four out of six weeks during the promotion. In February, we launched our new pancake of the month, where each month we're introducing a new pancake flavor and the opportunity for members to earn bonus loyalty points to keep guests engaged and coming back.

In April, we launched national TV advertising to support the campaign, and sales have trended in line with our most popular flavored pancakes after only two months. This is also a good example of how we pair new menu launches with exclusive loyalty benefits to continue to grow that platform. Our loyalty program sign ups steadily increased during the quarter, and as of today, we are at 9 million members. In February, we also celebrated IHOP's National Pancake Day. This year was particularly special as we served over 1 million pancakes to our guests. And we launched a new nationwide community platform, Stacking Up Joy, designed to bring people together in the communities we serve. The Stacking Up Joy platform garnered 2.3 billion impressions and raised enough money to donate over a million meals to people facing hunger.

As I mentioned earlier, the closure of our virtual brand partner, Nextbite, impacted our year-over-year comp sales. However, we still see opportunity with virtual brands that target IHOP's off peak hours and utilize kitchen capacity outside of our traditional daypart to support incremental sales growth. In partnership with Virtual Dining Concepts, we recently introduced two new virtual brands: Refuel Tenders and Burgers, developed in collaboration with NASCAR and MLB Ballpark Bites, created in partnership with Major League Baseball. Over 1,000 restaurants now offer at least one of these brands and 50% offer two or more as of May. Outside of our IHOP restaurants, our CPG coffee line is on more than 30,000 retail shelves across the US and continues to grow, with two new varieties launching soon.

This past quarter, we announced our limited time partnership with Lay's to launch the IHOP Rooty Tooty Fresh 'N Fruity flavored Lay’s potato chip, which reinforced brand awareness and was a sellout in retail channels. Operationally, our point of sale rollout is nearly complete and we are now starting to shift our focus to tablets and payment devices. More than 50% of the IHOP system has implemented tablets and payment devices to date. And we are encouraged to see the transactions taken on tablets with payment devices have a higher beverage attachment rate, improved table turn times, decreased voids and higher tips for servers. As you can tell, there's a lot going on at IHOP. While the performance was obscured by tough conditions and the virtual brand rollover in Q1, these initiatives give us confidence for improved performance through the remainder of the year.

Turning now to Fuzzy's. As a refresher, we acquired Fuzzy's in December 2022 to diversify our portfolio with a fast casual concept, to offer franchisees in the Dine system a third brand in which to invest, and because of its potential to accelerate our long term growth. To contextualize its current scale, as of Q1 2024, Fuzzy's is a 128 unit brand and a highly concentrated geographic footprint with more than half of its locations in Texas. We've completed our integration and are starting to see the benefit of leveraging the capabilities and expertise of the Dine platform, particularly as it relates to Fuzzy's introduction of value driven promotions and marketing. While the quarter was impacted by weather and high pricing from franchisees, we are executing near term initiatives to support our long term growth strategy for Fuzzy's.

For example, during the quarter, we tested a new advertising campaign, a first of its kind for Fuzzy's, highlighting the launch of its Primo Baha menu. We're pleased with the initial results and we'll continue to explore additional opportunities to grow the brand. While we're not yet giving development guidance for Fuzzy's, we'd like to provide an update given its strategic relevancy to Dine's overall growth. Over the past year, Fuzzy's has been focused on cleaning up its system, which included some strategic closures. We're excited to share that we recently signed two multi-unit deals, an existing Fuzzy's franchisee has committed to developing 15 restaurants and an IHOP franchisee has committed to develop 25 Fuzzy's restaurants over the course of the next several years.

While we won't see impact in 2024, these deals speak to the potential of Fuzzy's as our growth brand in 2025 and beyond. We're pleased with the opportunities we're seeing post integration and we'll continue to focus on driving brand awareness and supporting new functions. On the international side of the business, we're impacted by geopolitical conflict in some regions, and we remain focused on our long term growth plans for the quarter. Our international dual branded Applebee's IHOP concepts are doing well and serve as a testing ground for future domestic application. Overall, development remains steady with four new openings and six planned closures in Q1 for a net closure of two restaurants. We remain optimistic about our international growth and strategically scaling our global footprint.

And finally, to touch on our development strategy. We're continuing to establish a strong foundation to efficiently scale our development program and we've made great progress this quarter building our internal capabilities to support development across the entire Dine platform, investing in nontraditional development, marketing and making several key hires. The team is actively in market reviewing opportunities for new sites, both traditional and nontraditional and working closely with franchisees to support their growth plans that are aligned with our previously disclosed pipeline and guidance. We're creating a support team and developing incentives for our franchisees to make restaurant development more approachable with new programs to provide access to capital.

We continue to see and are very pleased by the cross pollination of franchisees looking for new opportunities across the Dine system, an important pillar to the Dine development thesis. We're also looking to accelerate new builds by responding to the demand for dual branded restaurants domestically. The interest we're receiving from franchisees about the dual branded concepts are all very positive. Of course, there's still plenty of work and research to be done around this concept and we're glad to see positive engagement from guests and franchisees alike. This quarter, we also launched the Dine Forward franchise program known as Dine Forward. Dine Forward is aimed at incentivizing potential franchisees from underrepresented communities to establish restaurants within our system and provide enhanced operational and financial support.

We're thrilled to announce that our first participant, a general manager who's been in the IHOP system for over 20 years, will open his first restaurant in DC later this month. It's important to reiterate that enhancements to our development function and the Dine Forward program are funded by reallocating costs within Dine's existing cost structure and not by increasing overall spend. Now to provide brand development updates from the quarter. As a reminder, we do not give quarterly guidance but the following commentary is to offer context to how we remain in line with our annual domestic development guidance goals. First, at Applebee's, we're making progress on the freestanding prototype, which is currently in Phase 1 of a nine month effort to significantly take out construction costs.

In Q1, Applebee's had net domestic closures of five and we are on track with our domestic guidance of 25 to 35 net closures. These were planned closures and built into our guidance. For Q1 at IHOP, domestically, we opened five restaurants and closed nine for a net closure of four restaurants. As is standard in IHOP's development cycle, we see more closures earlier in the year with new openings concentrated toward the latter half of the year. We remain on target for our full year guidance with net 15 to 25 new domestic restaurants. And with that, I'll turn the call over to Vance.

Vance Chang: Thank you, John. While the quarter was not as strong as we had anticipated due to external headwinds, we remain committed to our guidance for the full year. On the top line, consolidated total revenues decreased to $206.2 million in Q1 versus $213.8 million in the prior year, primarily driven by the negative comp sales growth across our brands. Our total franchise revenues decreased 2.3% to $175.9 million compared to $180 million for the same quarter of 2023. Excluding advertising revenues, franchise revenues decreased 2.2%. Rental segment revenues for the first quarter of 2024 decreased compared to the same quarter of 2023, primarily due to prior year lease buyouts. G&A expenses increased 2.2% to $52.2 million in Q1 of 2024, up from $51.1 million in the same period of last year, mostly due to an increase in stock based compensation and an increase in consumer research costs, offset by a decrease in professional services.

Adjusted EBITDA for Q1 of 2024 decreased to $60.8 million from $66.4 million in Q1 of 2023. Adjusted diluted EPS for the first quarter of 2024 was $1.33 compared to adjusted diluted EPS of $1.97 for the same period of last year. Now let's turn to the statement of cash flows. We had adjusted free cash flow of $29.7 million for the first three months of 2024 compared to $2.3 million for the same period of last year, driven by an increase in cash from operations and a decrease in CapEx as we concluded our technology initiatives from last year. Cash provided by operations at the end of first quarter of 2024 was $30.6 million compared to cash provided from operations of roughly $16.1 million for the same period of 2023. The increase was primarily due to a favorable increase in working capital.

CapEx through Q1 of 2024 was $3.3 million compared to $16 million for the same period of 2023. We finished the first quarter of total unrestricted cash of $145 million compared with unrestricted cash of $146 million at the end of the fourth quarter. Additionally, we continue to return capital to investors. We repurchased $6 million in shares and paid $7.8 million in dividends in Q1 of 2024. Next, let me discuss Applebee's performance. Q1 same store sales were negative 4.6% as we lapped strong comps from the prior year and will continue to face a price sensitive consumer environment. Average weekly sales were over $54,700, including over $12,000 from off premise or over 22% of total sales, of which 10.7% is from To Go and 11.4% is from delivery.

IHOP's Q1 same store sales were negative 1.7% as we lapsed strong comps from the year prior. Average weekly sales were $37,600, including $7,900 from off premise or 21% of total sales, of which 8% is from To Go and 13% is from delivery. On the labor front, franchisees are reporting that staffing continues to improve and labor costs, while elevated, have stabilized. Turning to commodities. We are seeing improvement in both brands for year-over-year market basket forecast with IHOP improving 20 basis points and Applebee's improving 30 basis points since January. Applebee's commodity cost this quarter improved 2.4% versus Q1 of 2023, and we anticipate flat to low single digit deflation for the remainder of the year. At IHOP, commodity costs improved 3.3% compared to the same period of 2023.

However, we're still expecting low single digit inflation for the full year due to pressure primarily coming from bacon, beef and orange juice. Our supply chain co op CSCS is working across the Applebee's and IHOP systems to identify additional cost saving opportunities and support restaurant profitability initiatives through both operational improvements and input costs. To date, in 2024, we have implemented projects resulting in over $12 million of annualized savings across the system. As a result of our restaurant profitability initiatives and the commodity deflation that we saw in Q4, on average, we have seen our franchisees’ Q4 gross margins improve and overall, their four wall dollars improve year-over-year. Before turning the call back over to John for Q&A, I'd like to quickly provide an update on our financial guidance for the year.

As I mentioned, we remain committed to the guidance we provided at the end of the fourth quarter; G&A in the range of $200 million to $210 million, including non-cash stock based compensation and depreciation of approximately $35 million; EBITDA between $255 million to $265 million; CapEx in the range of approximately $15 million to $20 million; Applebee's domestic system wide comp sales to range between 0% and 2%; IHOP domestic system wide comp sales to range between 1% and 3%. And on 2024 development, we're expecting 25 to 35 net fewer domestic Applebee's restaurants and 15 to 25 net new domestic IHOP restaurants. With that, I'll hand the call back over to John.

John Peyton: Thanks Vance. To wrap up, thank you to our franchisees and team members for their ongoing work and commitment to growing our brands and serving our guests. In an environment in which our guests remain price sensitive, our brands are known for delivering abundant value. We're confident in our recipe for growth, and our focused development strategy will generate sustainable value over the long term for our shareholders and franchisees. And so now, we'll open up the call for questions and turn it back to the operator.

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