Q1 2021 Dine Brands Global Inc Earnings Call
Hello, and welcome to the first quarter 2021 dine brands Global earnings Conference call.
It's Christian and that'll be a conference operator today after the speaker's presentation, there will be a question of at least session, but he.
We ask that you. Please limit your question to fund and for the.
The follow up.
Please also note that today's conference is being recorded.
I'll now turn the call all bits of Mr. Ken <unk> Executive director of Investor Relations, Sir you may begin.
Good morning, and welcome to Dine brands first quarter 2021 conference call I'm joined by John Peyton CEO, all of sudden hall interim CFO and controller, Jay Johns President of IHOP, and John <unk> President of Applebee's.
Before I turn the call John Please remember our same park safe Harbor regarding forward looking information during the call management may discuss the information that is forward looking and involves known and unknown risks uncertainties and other factors, which may cause the actual results to be different in the express or imply.
Please evaluate the forward looking information in the context of these factors, which are detailed in today's press release and 10-Q filings.
The forward looking statements rather of today and assumes no obligation to update or supplement. These statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on dine brands website with that I'll turn the call at Wingstop. Thanks, Ken Good morning, everyone. Thanks for joining us today, when we spoke last quarter I shared at <unk>.
My belief that the industry and our brands in particular, we're on the cusp of of restaurant Renaissance and our headline today is that the Renaissance is here the.
I Love this notion of Renaissance, because it's all about resurgence and creativity and pushing beyond the established boundaries and that's exactly what we're doing at dine brands, we're changing the way people think and we are turbocharging creativity and experimentation of.
Willingness to learn and adapt its flourishing throughout our organization I see at every day from our franchisees to our company staff to the restaurant teams and our general managers and our servers and that's why I am so proud of our company and our franchisees I'm proud of our management team and I'm, especially proud of the thousands of hardworking restaurant team members at.
Around the world.
Now as I look back on the first quarter. It's remarkable how we continue to persevere and growth are our brands posted meaningful improvements during the first quarter and on this call Alison John Jay and I will be comparing comp sales to the same period in 2019 due to the pandemic profound distortion of 2020 sales.
So let me share of those results through the lens of store sales total revenue and cash generation because of obviously each one leads to the next so first sales average weekly sales at both IHOP and applebee's exceeded pre pandemic levels several different times during the first quarter.
According to Black box and this is impressive applebee's increase in same store sales for Q1 outperformed the casual dining segment.
Off premise in March both IHOP and Applebee's off premise sales reached absolute dollar levels higher higher than when the restaurants for 100% off premise in 2020, indicating the staying power of this largely incremental business.
Revenue, we achieved revenue of $204 2 million and EBITDA of $58 1 million, reflecting strong underlying performance across our business cash.
Cash we generated free cash flow of $30 7 million, which in part enabled us to repay our $220 million revolver in early March and also importantly, our franchisees opened 10, new restaurants during the quarter, indicating that theyre beginning to pivot towards growth.
We're very encouraged by our Q1 performance and we're certainly optimistic that economic tailwind will sustain us throughout 2021 contributing to that view is historically high consumer savings at the federal spending that we've been enjoying as well as a new potential infrastructure bill the unemployment rate at the lowest system, Inc. Pandemic began and.
With vaccination is rising the economic growth that looks firming and the strength and resilience of our brands I'm confident that we will build on the strong Q1 performance to drive market share gains and deliver profitable growth throughout the year.
Now our fundamental strength of something many Ceos would love to have the number one we are an asset light 98% franchise model that is of significant generator of cash second we've got two iconic world class brands that are number one in both the casual and family dining categories and third we got the Moe.
Talented most resilient team members in the industry today, along with the next generation of workers still to be hired.
And as tough as the passengers spin the pandemic actually gave us new competitive competencies, here's what we have today that no one could have of even imagined pre COVID-19.
We've got significant incremental off premise business in both brands. Our teams moved quickly and aggressively to add the tech and operations capability needed to nurture and sustain this new business.
The second we leaned heavily into ghost kitchens, and virtual brands like cosmic wings and others on the horizon that offer new sources of revenue per dine and our franchisees all of that due to the creativity and talent of our people and we advanced our digital platform and loyalty programs that will increase our share of wallet.
So with COVID-19 vaccine appointments now more widely available and capacity restrictions being eased across the country. We are seeing increased traffic in our restaurants.
Couple of questions that might be on your mind first is about hiring and that is certainly a challenge in the industry today and all around the country. So I want you to know that we are aggressively working to help our franchisees recruit adequate staffing to accommodate the increase in demand and this is a great example of where dine scale makes a big difference.
We're launching national campaigns for two recruiting days next week, Applebees and IHOP for collaborating with their franchisees on the 17th of 19 with the goal of hiring more than 20000, new team members and we're making it easy to apply the of text E mail and in person and both brands are leveraging very creative social campaigns to <unk>.
<unk> interest.
Your second question today might be around procurement and I want you to know that we're working to secure the continuity of our supply chain. During the past few months the surgeon guests going out to eat created demand that has outpaced supply. This is actually not a terrible problem to have if we see at its just a moment in time Nonetheless our per.
Co op remains heavily engaged with both brands and we've adjusted our full year of food forecast slightly upward due to generally higher commodity and input costs.
However, we expect prices to fall back to equilibrium as our suppliers adjusted the new demand forecasts over the remainder of the year.
We want the world to know right now that Applebee's and IHOP are open for business. So our marketing plans encompass national TV and digital media, social media platforms, and one to one marketing and of course as.
As we welcome guests back we remain focused on providing them with a welcoming and safe environment, both IHOP and applebee's of standard operating procedures in place and our employees have done a terrific job of adhering to the best practices like QR code menus upon request tables at arent set until the guest the ceded the proper use of masks at <unk>.
Hence cleaning protocols.
And so the safety in place, we're doubling down on innovation to fuel the Renaissance and specifically, we've got five growth platforms that build on <unk> competitive advantage number one where we're developing and investing in new smaller restaurant prototypes for both brands flipped at a good example of our new thinking number two was off premise enhance.
The technology like fly by.
Number three virtual brands think cosmic wings number for his ghost kitchens for IHOP, Theyre up and running in Dubai, Kuwait, and Saudi Arabia, and for Applebee's, and Cosmic wings were up and running at La Philadelphia and coming soon in Miami.
And as always we're focused on new culinary creations like IHOP is for readers and bowls.
So I know that you are waiting for our comprehensive long term growth plan and I can tell you that we're currently conducting is top to bottom strategic review of the business at.
And as part of that process, we're embracing of bigger more holistic vision for our future, but in the north in the near term I can tell you that we've already decided to lean into three incremental investments that I know will make a difference and since we spoke last quarter for <unk>.
First is technology that enhances the guest experience.
We're accelerating the redesign of IHOP dot com and the IHOP App, we're accelerating the flipped website and its app as well as the platform needed to support our loyalty programs for IHOP and Applebee's.
Second we're leaning into flipped by IHOP will increase investment to accelerate the launch of this I have sister brands and on that topic I can just say stay tuned for some news coming soon.
And third we're making investments to improve the guest experience and our portfolio of 69 company owned applebee's restaurants in the Carolinas, which by the way consistently rank among the top performers in the domestic applebee system based on sales.
So these three investments that I, just mentioned are largely an investment in capex and they represent an additional $5 million in capex. Since we last spoke we don't expect them to all of our previously issued G&A guidance.
So I'm confident in our plans and very confident in our management team. We've identified the building blocks for the restaurant Renaissance and we will use those as a way for all of you to continue to file of the progress of our story.
An important part of our story of the strong balance sheet because it enables us to create that future announcement now give you an update on that as well as on our financial results. Thank.
Thank you Jeff.
Overview of the exciting things youre going to do at <unk>.
Brands in terms of currently getting good morning, everyone I'll begin with an update on the business our performance in the first quarter reflects kind of consumer demand for our brands.
That means being in the initiated across the country.
Distribution of government stimulus checks and the gradual easing of Danaher and restrictions.
At the end of the first quarter, 99% of our domestic rationales for open for the dining operation with restrictions in some states.
I'm pleased to reiterate that we repaid the 220 million draw down for the revolving credit facility in early March 2021 as planned we now expect to achieve an annual interest savings of approximately $5 million of.
Our cash position remains strong we ended the first quarter with total unrestricted cash of $179 6 million.
This compares the unrestricted cash of $163 4 million for the fourth quarter of last year is free in the $220 million debt was drawn against our revolving credit facility of 10% interest.
Switching gears to our operating results.
Starting with the income statement.
For the first quarter adjusted EPS of $1 75, compared to the dollar 45 for the same quarter of 2020.
The year over year improvement was primarily due to lower tax expense as well as the higher gross profit driven by the increase in revenues from Applebees company operating the restaurants due to a higher average check and interest traffic.
We really of the distribution of the latest round of government checks in March favorably impacted both traffic and average check the.
The increase in average check was also partially attribute of a favorable product mix.
And Descartes share.
Gross profit for Applebee's company restaurant, five nine percentage points to 9% for the first quarter compared to the same quarter in 2020.
Rental segment revenue for the first quarter of 2021 was $26 1 million compared to $29 million for the same period last year.
This is primarily due to the decrease in base rent, resulting from restaurant closures and lease buyouts and the decline of percentage of interest income based on franchisee sales.
Rental segment.
The profit was 19, 8% for the first quarter of 2021.
This represents a sequential improvement of 12 percentage points compared to the fourth quarter of 2020, which is more heavily impacted by charges related to the planned closures of underperforming restaurant.
Turning to our GAAP effective tax rate for the first quarter, our effective tax rate for the first quarter of 2021 was named of six 6% compared to 23, 2% for the same quarter of 2020.
The change in the effective tax rate was primarily due to onetime recognition of excess tax benefits on stock based compensation related to the departure of our PBC.
Switching gears to Jeanie G&A for the first quarter of 2021 with $39 9 million compared to $37 6 million for the same quarter of last year.
The increase was primarily due to higher personnel cost associated with equity based incentive compensation.
The offset by lower travel costs.
We continue to the SG&A as a significant lever for the organization.
Turning to the cash flow statement of cash from operations for the first quarter of 2021, the $30 6 million compared to $29 six nine for the same quarter last year.
The increase was primarily used the recognition of excess tax benefits of stock based compensation.
Our highly franchise model continued to generate strong adjusted free cash flow of $30 7 million for the first quarter of 2021 compared to $27 5 million for the same quarter in the prior year.
The variance was primarily due to the increase in cash from operations, Jeff discussed and lower capex compared to the first quarter of 2020.
We believe at our strong cash position cash from operation disciplined G&A management and the ongoing improvement of is this will allow us to invest in growth as the recovery from the pandemic continue.
Regarding capital allocation and financial flexibility.
Decisions are driven by the improvement in our restaurant operations in sheet condition at.
The result of a progressive recovery the chosen repay the $220 million drawn against the revolver in early March.
We continue to value.
For me, which will influence our decisions on capital allocation.
Turning to our franchisees of assistance program.
As of March 31st 78% of the $61 9 million in royalty and advertising fees.
And rent payment deferrals that dine brands related to 223 franchisees across both brands has been the pain.
<unk> started the year strong both applebee's and IHOP posted meaningful sequential improvement in comp sales.
Average weekly sales in dollars for both brands in the pre pandemic level at certain weeks during the first quarter.
We ended the first quarter of the strong cash position, allowing us to make additional investments in our business with.
We're very pleased with our start to 2021, and we remain optimistic about the second half of the year.
Now you'll hear more of our brand President Scott in the Johnson the ski will tell you about the significant progress, we're making at Applebee's, John Great job Allison. Thank you and Hello, everyone. After a year of navigating the pandemic March and April represented an extraordinarily positive inflection point for the Applebee's brand.
In fact in more than four years as president of Applebees honestly can't recall of the brand being better position than it is at this very moment. We just delivered the two highest monthly sales volumes Applebee's has achieved since the inception of dine in 2008 in fact, it's quite likely March and April represent two of.
Our all time highest volume months of the 40 year history of the brands, but I really can't confirm this as our database only goes back 13 years.
I can confirm as at March comp sales were positive six 1% versus 2019, reflecting the confluence of consumer stimulus compelling marketing and most importantly operational excellence.
Momentum continued to accelerate in April is applebee's delivered of plus 11, 4% comp sales result versus that same 2019 baseline.
While it is impossible to determine how much of this momentum can be attributed the government stimulus versus organic demand, it's very clear to me the Americas dining out again in full force.
So here's the real story according to Black box 2021 comp sales versus 2019 as John referenced Applebee's has now significantly outperformed the casual dining category for 12 consecutive weeks.
At this an average of 560 basis points.
Many respects this is reminiscent of Q1 of last year. When we posted 10 consecutive weeks of positive comps for the emergence of COVID-19 clearly applebee's momentum has returned and its return of a very powerful way.
It's important to remember that this momentum started to emerge in the last week of February well before stimulus checks when we introduced our successful burgers and wings event. This message really resonated with applebee's guests behind the enormously popular chicken fried lyrics from our friends at the Zac Brown band and the.
The April return of our signature irresistible currently on Air is the latest example of applebee's, providing big flavor and abundant value. This advertising was choreographed to the classic ACDC rock anthem back in black and the deliver breakthrough results.
This is just more evidence of applebee's talented marketing team continuing to innovate around what I firmly believe to be the most enduring memorable and likeable AD campaign in the entire industry and frankly outside of the industry of <unk>.
I'm talking about even good in the neighborhood something Thats, a real point of pride for our franchise partners. The restaurant teams and our entire organization, we hear about our advertising all the time from our guests and the always brings a smile to my face.
Really important to our guests as the innovation of our team continues to deliver behind Applebee's five dollar mutual cocktails as we begin to see the alcohol business steadily return to pre COVID-19 normalcy.
The easing of capacity constraints, the opening of bar seating and the reemergence of our late night day part represent clear incremental growth opportunities as we progressed through the year.
And after scaling back of media spending in January and February our National Media plan is now substantial and equally balanced throughout the remainder of the year with favorable Q2, Q3, and Q4 comparisons with each of the same quarters in 2019, which bodes very well for the brands.
Additionally, there are other indicators that our performance isn't short term in nature, Applebee's unaided brand awareness and advertising awareness continue to significantly outpace all casual dining competitors.
In key metrics, such as affordability menu variety of guest satisfaction brand affinity and likelihood the visit consistently outperformed the category average.
Now I'd like to share a few insights regarding our on premise and off premise business for both March and April Applebee's restaurant sales averaged an impressive $54000 per week as anticipated our on premise business has steadily increased as dining restrictions have eased at <unk>.
Noting here that our off premise volume has held steady between 17000 $18000 per week per restaurant, reflecting the staying power of the soft premise business.
Without question Applebee's has significantly broadened its reach and relevance within this important convenience driven segment.
For the month of April Applebee's sales mix consisted of 67% dine in at 20% car side to go and 13% delivery.
Included in this delivery segment as our new virtual brands Cosmic wanes and after about 10 weeks end market Cosmic wing sales of averaged about $330 per restaurant per week with significant geographic variability, reflecting uber eats coverage for context individual restaurants range from below a $100 per.
Per week to a high of $2000 per week now importantly, we had post makes delivery. This week and then expand to include door at Ash later, this month, which will significantly enhance cosmic wings distribution visibility and trial.
After this expansion I should be able to quantify the size of the cosmic wings opportunity in the meantime, you can use your imagination as to what the addition of door Dash may mean for the business.
No.
With respect to restaurant operations.
Very encouraged with the integration of handheld tablets at about 500 Applebee's restaurants.
The staffing challenges across the country. These tablets provide a meaningful hedge against labour inflation, while enabling our service to be far more efficient and taking care of the guests. The bottom line of servers love. These tablets because it makes the job easier and allows them to make more money the.
Additionally, one of the positive outcomes of this past year was the approximate 33% reduction at our core menu and the simplification of our operation.
The resulting food and labor benefits of had a favorable impact on restaurant margins as well as restaurant execution.
I should also reinforce that over the past year. Our teams have been quietly focused on building an awesome innovation pipeline of culinary beverage marketing and technology initiatives for future deployment.
So in wrapping up it's quite evident to me that America trusts Applebee's as we're beginning to see the benefits of the goodwill the franchise partners worked so hard to create over this past year.
Virtually all of our restaurants are now open royalty collections remain rock solid our advertising fund is now comparable to what it was in 2019 and it's a big lever for US moving forward, we have an exceptionally talented team who have been eagerly awaiting this day and franchisees are aligned behind our business plan and confident in our ability.
To not only perform but to thrive in this environment.
For the first time in the long time I now believe we control our own destiny and we're poised to unlock the full potential of this great brand.
While I'm sure there'll be other challenges along the way there always are applebee's has genuine momentum right now and I couldnt be more optimistic about our future than I am right now, thank you and with that I'm going to turn it to my partner J.
John you must be really proud of those results in one of your team and franchisees are accomplishing right now I know I'm very proud of it so nice job.
Good morning, everyone like Applebee's, we've made great progress this quarter.
Compared to where we were during the pandemic as well our first quarter comp sales improved sequentially by eight nine percentage points compared to the fourth quarter as our business improved our average weekly sales in dollars has grown significantly and surpassed pre pandemic levels at times during the quarter as stimulus checks provided at our guests.
With additional buying power.
Average weekly sales were approximately 26000 for January and sequentially increased to just under 36000 for March reaching a high for the quarter of approximately $40000.
Regarding our domestic restaurants opened for business, 97% of restaurants were opened for dine in service with restrictions in most states as of March 31.
That compares the only 70% with dine in as of December 31.
With guests eager to return to in restaurant dining we're pleased the California recently increased indoor restaurant capacity to 50%.
<unk> presence in California at makes up approximately 13% of our domestic business. So were optimistic about the potential lift overall there.
To drive sustainable growth, we're continuing to execute against for strategies.
As I discussed with the last quarter. These are focusing on our PM day parts, providing compelling value maintaining our gains in off premise sales and lastly, our development growth.
Our plans have yielded tangible results and.
To provide some color on our first two strategies focusing on that PM day, part and value. We launched I happy hour in September of last year to offer our guests of broad selection of value options. During those non peak day part hours, mainly to the 10 P. M I.
<unk> continues to drive incremental sales, even as business improves across all of our day parts.
Additionally, IHOP yaris traffic is two to three times higher than the rest of the day compared to September 2020, when we launched at this actually quite two of low to mid single digit lift in sales for the entire day.
To further increase the appeal of IHOP yards menu, which has been very well received by our guests and we plan to update the menu items over time.
We're continually innovating to maintain IHOP category of leaving leading position in family dining.
Our latest innovation as the IHOP, new Steakhouse premium Bacon, which is available on our new Bacon obsession of menu.
The IHOP the first national family dining restaurant chain to offer this type of thick cut premium bacon.
The Bacon of session menu continues to solidify our position as the leader in breakfast and highlights our commitment to both innovation and value of across all of our day parts.
During 2020, we play both defense and offense to remain resilient during and also prepare to thrive after the pandemic we.
We play defense by making operational changes and moving heavily youre completely at times into off premise occasions.
But we also invested heavily in our menu and preparation for the recovery.
We wanted to be ready with the fresh and appealing menu for guests to enjoy when they return to our restaurant, but also accommodate guests who choose to dine on premise.
This culminated in the launches of <unk> and our signature burrito of involves both have been very well received by our guests for.
It isn't balls perfectly filled the gap, we had in our menu and continues to capture 8% to 10% of total ticket order incidents since we launched it was really minimal promotion.
Our overarching menu strategy underscores innovation and supports both breakfast and non breakfast occasion, while also being portable for guests on the go.
Now, let's switch gears to our third strategy of maintaining our gains in off premise sales.
Despite capacity restrictions generally being eased across the country in the first quarter. Our alternative sales held steady at 33, 3% of total sales at flat compared to the fourth quarter.
However, we've seen a steady increase in net off premise sales in dollars.
For the first quarter. Our sales mix consists of 66, 7% dine in 16, 8% to go and 16, 4% delivery.
We continue to believe that sustaining off premise sales mix at a much higher rate is feasible in a post pandemic environment and will strongly complement the anticipated return of our dine in business.
In fact, our weekly off premise sales in March reached dollar levels higher than we were a 100% off premise last year, even at the height of the shutdowns in.
In the first quarter and the overall business increased so has the to go business.
The pandemic has certainly influence consumer behavior and change how guests use the IHOP, we adapted to the changes in behavior through innovation and developing highly portable items such as three of them bowls, we believe the convenience of takeout and delivery will remain appealing to our guests.
Turning to our fourth strategy development.
We have the benefit of being able to now provide our franchisees with for different development platforms. These includes our include our traditional formats nontraditional, our first flipped by IHOP locations, which we planned to open in 2021 and the new small prototypes that we intend to test this year.
In the first quarter of franchisees opened eight new restaurants globally and for the remainder of the year, we expect to resume development that was paused due to the pandemic.
Looking ahead, we have a plan in place for more robust development starting in 2022, we believe the brand can potentially exceed its historical annual average of approximately 60, new restaurants opened over the last decade as.
As we begin to plan our growth for the next three years, we intend to have a blended mix between these four types of development vehicles.
We made great progress over the last 12 months, we're successfully executing against our four strategies and are seeing tangible results IHOP remains in a position of strength and is poised for long term growth.
I'm going to now turn the call back over to John Payne for his closing thoughts on how IHOP and applebee's are positioned to thrive coming out of this pandemic John.
Thanks, Jay and John announced and your leadership during all of 2020 of is what led to a great quarter in Q1, and thanks for telling our story today.
The Guy can't I can't say it enough to all of you on the call the restaurant and Renaissance is here in our Q1 performance is certainly evidence of that I've got so much confidence in our future because I really believe that restaurants are an essential part of society and people want a place to gather and celebrate and after 13 months of being locked in our houses.
Americans are ready to do that our people our teams our franchisees and the thousands of restaurant team members across the country are amazingly resilient they've demonstrated this time and time again and they are ready to welcome guests back into our restaurants.
I mentioned last time that I worked in my parents restaurant when I was in high school and Thats why I think the favorite part of my job because when I get to visit the team members in the field I finally gotten to do that in the last couple of weeks and it's at.
Truly energizing and invigorating and what impressed me the most on my recent visits to our restaurant is that even after 13 months of <unk>.
The extreme challenge I was greeted with.
Unbelievable enthusiasm and optimism about the future and every team member I met from the kitchen staff to servers. The hosts our general managers told me they love our two brands and all they want to do with welcome guests back into the restaurants. So as we transition to a post pandemic environment Dine will continue to invest in innovation and strategic and the strategic plan.
Forms that we know will drive long term sustainable growth and with that we are looking forward to taking your questions.
And I will turn it back of the operator.
Ladies and gentlemen, if you had the question at this time please press the smaller than the number one key on your Touchtone telephone.
And again, we ask the queue. Please limit your questions to one set of one follow up.
Your first question is from Brian <unk> from Deutsche Bank.
Hey, Thank you.
Just a question about the development outlook at IHOP.
Remarks, Jay at one for different avenues for growth traditional and non traditional.
Slips in the small prototype prototypes, but John Payne there'll be great stood at take like when you add it all up what is the right way to think about the potential domestic net unit growth pace for this business over a multiyear period as this of 1% to 2% net unit growth business in the normal of your credit actually gets at 3% to 4% of your initiatives take hold any thoughts.
Great and if you want to layer in anything on maybe more near term conversion opportunities that would be helpful too.
So I think Jay I'll talk specifically about IHOP and then I'll come back on the second half of that question.
Yes, Brian.
Obviously the way we're looking at this is we think we can really ramp up development coming out of this pandemic end to kind of answer. Your last question first we're already seeing our franchise each bring us a lot of sites that are conversions and we're very good at conversions, we have about a third of our system used to be something else. So while we develop.
New prototypes and do a lot of prototypical work, we do a lot of conversions as well and I think that will ramp up in this environment coming out of the pandemic.
I think as we move forward, we'll probably initially see the heavier load of the development be more traditional and non traditional keeps growing over the last couple of years, but as we get flipped stood up and get results. There I think that will speed up I think the small prototypes for testing.
We will speed up as well and I think that in marrying those two thoughts we're already seeing the franchisees bring us smaller buildings as conversions as well and we're going to not only have new productivity will small prototypes will be testing, but we're going to be doing some conversions that includes applying the small prototype.
The areas and philosophies into conversions as well.
Yes, Brian I want to be careful here I don't want to give specific guidance on where we think the the development growth for both brands will land, but I will tell you where I think we of potential and I'll tell you the challenge that I've given to both Jay and John when it comes to growth.
As you know IHOP grows at about 40% to 50, new restaurants, a year has been at the historical rate.
As I look at the market as I look at the for different prototypes of that Jay discussed My challenge to Jay is is to double that pace and we're looking to see if we can if we can put plans together that get us there I think it's possible, but I think give us another quarter before we give you.
The forecast, but that's the challenge when it comes to Applebee's. We've spent the last three years under John's leadership of <unk>.
Cleaning up and tightening the portfolio, we've reduced it by by several hundred restaurants. So that we now have a much tighter high performing group of restaurants to move forward with and we're at the pivot point now where we can focus we can pivot from our effort on cleaning up the portfolio to growing again and Thats the challenge that the.
John has is working on a plan.
To grow the the applebee's with somewhere in the neighborhood of 10 to 15, new restaurants, a year and again I want to be careful I'm, not giving you a of <unk>.
Forecast, but just the challenge that I think our brand leaders have and the.
The potential at I think we have as we put our plans together for the next couple of months.
Thank you and then just as my follow up to me over the Applebee's John. Thank you for some of that color about Kosmos wings in your prepared remarks. After you add post made some door dash as partners and you've had some time to evaluate is there a threshold level of sales that youre looking to see where you will know that this is an initiative for you want to stand behind over the long term end.
And related to debt do you think the fact at Applebee's as a franchise system rather than company owned does that make the.
The launching of virtual brands harder I'd, just be curious to hear your thoughts. Thanks.
Hey, Brian good questions.
Love Cosmic wings, so the business is incremental.
It's not complicating our operation of our franchisees love it as well, we're not going to know the full potential until post made some door dash come online that sort of phase two as I mentioned on our next call up for you.
Are you able to dimensionalize that pretty well.
As to whether it's more complicated.
Within a franchise business versus the company owned business.
I can't comment on that other than to say, we've got 30 exceptional partners in anytime we have the business case that represents incremental growth the align behind it we do everything together here were strategic and have had no issues in partnership with the franchisees. So.
I don't see of difference there from my perspective.
Thank you.
Thank you for the next question is from Jake Bartlett from COVID-19 Securities.
Great. Thanks for taking the question My first one is for Jay.
Just looking at the performance of the Applebee's in April specifically.
Versus IHOP on the the differential in the sales recovery what are the main reasons for that for the difference.
As you see at.
Any way you can kind of quantify those.
Some of US is less late night business, but just things like that to help us understand why the recovery at at IHOP is is trailing applebee's.
I think that's of Great question Jake.
I think it's a few different things and this is my mission when I get up every day to close that gap and John has set a high bar for me to go after so I actually appreciate the excuse me on my toes I think the big difference is.
As we've talked about before the capacity restrictions hit us very hard on the weekends.
I can I can see if I just look at my sales trends without getting in specific numbers.
We've been doing really really well during the weekdays and then I see my sales dipped back off again on the weekend. It is obvious at what's happening is as we as we don't need the extra capacity, we are doing great with our recovery as that capacity squeezes off on the weekend.
We're seeing that impact I think the other big piece for US is we're we're typically a 24 seven type business.
And as franchisees are trying to get themselves stack.
We said about our recruiting days and it's very well documented in the industry. The staffing issue at the moment, but the franchisees are adding hours and days and overnight back online as they are capable of doing that and that's a little bit of of slow process slower in places like California. So.
We're missing some of our sales in some of the day parts in hours that we used to have that's going to take a little longer to come back as well and then the third part is still an opportunity for US is obviously the the new way as we've talked about before the new way people are working they are working from home, they're not going out there not necessarily stopping for breakfast the way they are.
It used to.
So the pattern of the business will different we've been able to send some of that off with the off premise and scope of business, but I think those of the bigger pieces. When we can get back to having absolute full capacity absolute full hours of operation at all of our locations I think we'll close that gap of that.
And.
And on the on the weekends now we are of a new name for it it's called the Adam Sandler effects.
So Adam can't get in IHOP on the weekend than we truly have capacity constraints.
Yeah.
Mike My next follow up questions for John for Winski.
And then just I wanted to better understand the commentary of the average weekly sales trends in March and April.
As I heard at it sounded like average weekly sales was the same in both months.
But it looks good from the same store sales at would've improved in April. So maybe just see if you can kind of clarify that and then within that the mix of off premise you said 17 to 18000.
Just trying to kind of gauge in April.
The the acceleration just how well the off premise business is held.
Yes, Jake the.
The off premise business is terrific you know that's the new core competency for us the our restaurants are now there were very good at it before the now really great.
And we see that in our guest satisfaction metrics.
Of that business has held in the $17 $18 range. So.
The the mix says.
As decline as dine in has come back if you look at it on a percentage basis. If you look at it on the dollar basis, it's held steady and.
Yes, the <unk>.
Mix between.
The to go in delivery is.
It continues to be fluid in particular.
As restaurants have opened back up but it's think about the.
68% of our business being.
On premise and the balance being off premise with to go being the lion's share of that off premise business.
Great. Thanks, Katherine the answer to your to answer your first question Jake $54000 per month very consistent in terms of average weekly dollar volume and the reason you see of swing from 6% to 11% comps has to do at the base.
Rollover from 2019.
Got it I appreciate that.
Thank you.
Your next question is from Brian Vaccaro from Raymond James.
Thanks, Good morning, I wanted to just revisit on the average weekly sales on the IHOP side, Jay could you just I missed what you said I heard of 36% of 40, but I wasn't clear if that was 36 in March of <unk> 40 in April So could you just kind of clarify the average with the sales dollars youre seeing in recent months.
Yes, I believe what I said was that when.
I was doing at sequentially by month basically so I said in January we were at 26000 and by March we were at 36000 and.
And we did have.
Some weeks in there we peaked out at 45.
Got it and could you share as John did on the Applebee's side, where average weekly sales out here in April for <unk>.
Uh huh.
I think that was in our release, we put out we.
The first was $1 of Im sorry, the average weekly sales dollars.
We haven't we haven't disclosed that but we just the percentage of the percentage was down four 7% April.
Okay got it got it.
On the effect of capacity side I appreciate at the details in the 10-Q and noted that more than I think it was around two thirds of the units at both brands still at less than 50%.
<unk> at the end of March I guess my question is how much progress have you made since then could you give maybe those buckets are of an idea of what percent of units are now at 100 or above 50% just trying to frame how much of the April improvement you might attribute to the easing capacity restrictions and then also obviously how much more of a benefit it could be in future months as.
The <unk> further.
Jay I guess I can start.
I think for Theres, a very fluid at changes all the time. So we've made a little bit of progress in places in California that had a few la county changed their color code today as a matter of fact, I think New York, New Jersey announced on the 19th of this month Theyre going to go completely open.
I think over the course of this month. This is just kind of keep getting better and I think on end of June.
Theres been communities as said by July they're going to open up completed by June there'll be opened up completely so I think on the IHOP side. This is just kind of keep getting better, but it's not a light switch of just flips on overnight at the slow triple the just keeps coming.
I concur with that Jake with Applebee's, we're far from fully optimized on capacity that represents headroom for both brands.
Into the foreseeable future.
Understood and then last one I just wanted to ask you mentioned some investments to enhance the guest experience can you just expand on what specifically you're doing there had these enhancements being made by other franchisees and if not what might the timeline look like for rolling it to the rest of the system.
Jake is that of reference to handheld tablets, sorry. This is Brian Vaccaro losses, yes.
Yes, well the handheld the I guess, John I think John mentioned some investments in the company stores of 16 on company stores and then you mentioned the handheld so I assume that was a part of it is there other things that youre doing to enhance the experience and then just kind of thinking broader across the system.
With respect to the Carolina portfolio of company owned portfolio.
We have some repair and maintenance work that.
Candidly was deferred a bit with the pandemic, we lost the 12 month period. There. So we're investing in the assets we're investing in the people we love our performance as John said, it's a top five perf.
Performer out of our 30 franchise groups.
So all of the investments that you would expect in terms of people.
And asset and technology are taking place in the Carolinas.
Got it I'll pass it on thank you.
The next question is from Eric Gonzalez from Keybanc.
Hey, Thanks for the question.
Presumably with the comp growth in April at Applebee's up 11 for and maybe down for seven at IHOP.
And then off premise mix of spending staying in the low to mid <unk> at both of your brands. My math suggests at the dine in business is roughly down.
At 10% to 15% versus 19 levels at Applebee's, and maybe 20% to 30% below at IHOP last month is that the is that in the ballpark.
Well I think on the IHOP side.
If you look at my numbers my as a percentage of my off premise business stayed exactly the same at 33% basically versus Q4, so as I said in my message what's happening at our total sales of going up we're making progress on moving almost in lockstep with each other at right.
My boats are floating up at the same rate so as I'm getting more business on dine and I'm getting the same lift on to go simultaneously, which is why the mix of staying the same even though the total sales are going up.
So I did not know long term I don't know how well that will hold when we're fully open and more people are willing to get out of the house and come out of the Eaton.
Maybe it's quite likely that the mix will drop at some point of Nonstate at 33%, but I'm looking at those dollar sales those are important to me because if I can get back mindful dine in business, yet, even if I've got 20%, 25% off premise mix, that's way higher than what we did before the pandemic.
All of the incremental business and the incremental flow through for my franchisees on the back side of the pandemic. So right now I am going in lockstep as the things are improving.
That will probably vary at some point, but right now the holding.
Just in terms of I think the question was sort of asked.
But at maybe asked in a different way the majority of that GAAP.
In the in the dine in sales do you think the majority that will be closed through traditional drivers such as marketing innovation, where do you think it is really just the capacity issue.
More of the low hanging fruit towards getting back that dine in business. I think this is Jay again, I think it's two different answers really because I think if we can solve that when you're comparing versus 2019, which is what we're all doing right now to see if you are back at pre pandemic levels. I think we can get there just with the capacity and just with hours of operation.
Everything else is going to be incremental of the Nexus go up we do a great job with new menu items, we do a great job of innovation, great job of marketing, we're going to steal share we're going to keep growing that is all upside I think afterwards, I think we can get back to to where we were and beyond just with the capacity and the hours.
In the Eric on the App.
On the side.
I've long believed there's been too much focus on off premise that the dine in the segment of our business will become a core strength again.
Think about at brand purpose.
Facilitating connections emotional connection the <unk>.
When folks over of meal, and the drink and they've been longing for that they are hungry to dine out again so.
The convenience driven occasion is very clear drivers.
But that dine in occasion as of that connection it's about indulgence, it's about being served and being relaxed and a little of escape from home, we love our position on that front.
Hey, Eric it's some patent Theres one.
Comments that I want to make on this at I think is important pull out which is which is the off premise business end, where it is right now for dine in for both brands right. So pre pandemic, both brands were slightly less than 10% and off Prem and now they're at about a third and at Jay to Jay's point, it's not.
Just the third that we're focused on it at the absolute dollar value of that off premise business is holding steady and has for months and months and months, so that looks like incremental business to us and at the same time that we're focused on welcoming our guests back to our restaurants as John talked about.
We are very focused on investing in and nurturing via technology and marketing that off premise business Applebees and IHOP. One could argue we're not significantly in the off premise consideration set before the pandemic and now they are and we need to keep debt yes.
Yes.
At that absolutely makes sense.
Maybe if I could ask one on the labor side, you've heard some management teams, saying the staffing will be a huge issue and others, maybe not as concerned.
At some others might be.
Do you see this as a temporary issue due to the <unk>.
Supply demand imbalance of the labor that exists due to the government of unemployment benefits for gist.
Really wondering what the house view is on the current state of the labor market, whether it's temporary or you can see at this in the longer term issue.
Yes, I'll take that it's John patent again for for both brands I would start by saying that the Applebee's and IHOP are both places where people want to work right. There are restaurants that are in the center of their neighborhoods and they're aspirational for the people who work in those brands and they love working there and we've actually been hiring for the past couple of months.
Though we're talking about 20000 people, who we need we've been hiring consistently.
We're leveraging the campaigns we are to do that we think this is the point in time. We think this is the point in time, where the labor market is sorting itself out as we transitioned from the federal funding and support and stimulus and enhanced unemployment benefits to a post pandemic economic environment and I think it's going to take we think three to six months for.
For us to get on the other side of what a steady state labor market looks like.
That's great I'll pass it along.
Your next question is from debt maybe from ATM quite price.
Great. Thanks, I appreciate the color.
You talked about you made of mentioned earlier of just the pressures that youre seeing on the inflationary side on on the food cost as well as labor could you share a little bit more color on that and then also as it pertains to how youre thinking about messaging going forward.
Other whether you feel like there is a disconnect between the ability to take additional pricing as an offset while still focused on value as your key is a key pillar just the.
The dynamics on both of those if you wouldn't mind. Thanks.
Yes, Brad it's John Payne and again I'll take the commodity side of it and then Jr. John Mike comment on the pricing and menu impact.
Yes.
As I mentioned during the last couple of months.
We are clearly has been a disconnect between the volume of guests in our restaurants and takeout versus with our suppliers we're prepared to meet.
And I think like the labor issue at the moment in time at the supply chain catches up but it is putting pressure on food costs.
Give you.
The range.
<unk> is looking at a one two to one 6% food cost.
Inflation applebee's at about <unk> eight to $1 five both of them are driven generally by paper and packaging pork and chicken and then IHOP.
Pancake mix, which is specific to them so.
Again, we see this as a market being at equilibrium and as suppliers of catch up to where we are with.
Demand, we think it will work itself out throughout the year.
When it comes to the way in which we reflect that in our menu pricing and John and Jay of can comment on that yes, I think the Brett This is John the.
There are a couple of points here, we certainly have labor challenges, we have food cost challenges, but I mentioned, a couple of initiatives that really of hedged against that and there is one I didn't mention the the server tablets, even though it's only in the third of our system at the moment is at very meaningful hedge.
The fact that we've we spent the past 12 or 13 months simplifying our menu. We did that early has led to very.
Specific food and labor savings on our restaurant P&l's significant benefit there, we're not going to give that up and if you recall of breath.
Over the past three plus years I've referenced store or a restaurant profit initiative in particular the work we did at Pwc early on we captured a couple of hundred basis points of cost reduction.
Both brands are restarting that work.
We candidly put it on the shelf during the pandemic that will start up again and that will provide benefits in particular as we look at 'twenty two.
Yeah. This is Jay on the IHOP side the.
Historically, our franchisees take between 1% to 3% and price annually.
And I think it's the balancing act and they're going to take in their local markets. What they think they need to take in the challenge of it is how do you take price to help offset cost, but not lose traffic because the top line is the absolute most important thing IHOP franchisees can get right now.
We can get our sales back that helps your bottom line and your profitability more than anything.
So I'm sure they will be taking price I'm sure they'll be in that 1% to three range.
Cases.
Depending on where they are and what their particular situation is will dictate whether they are taken on the low end of that of the high end of that probably.
Value is a key pillar of ours, but thats the drive traffic, that's the drive people who need value to come to a restaurant.
The interesting thing about any value platform is if you do at well like at all.
The <unk> platform.
As a percentage of people at by that but a lot of people that come with more than half you will come with them are buying full price items. So the overall mixture of that value and with the other menu items helped the franchisees maintain profitability. So.
It's going to be a balancing act and sure there'll be some price. They will take we don't want all of these traffic because of the zone.
And the final point of making that breath from an applebee's perspective, we ranked number one on affordability in casual dining we love that position when they're all sorts of creative ways to convey the value of consumer.
Beyond the simply price.
Thank you.
Thank you.
Your next question is from the <unk> from Wedbush Securities.
Thank you.
Obviously post COVID-19.
There seem to be.
Some of the changes that are permanent.
Beneficial.
You talked about the yogurt growth in marketing in Q2 Q3 Q4.
How does the message of change if at all.
There has been a very heavy focus on value.
Of the innovation.
Productions.
Gonna be higher versus say 2019.
The color there would be helpful.
Nick could you repeat you said.
What the higher.
New new menu innovation.
Yes, so on the Applebee's front.
We took a pause on innovation, we simplified we reduced the menu.
As I'm certain many brands have so.
Our messaging is.
Yes.
We strike the balance between being welcoming and reassuring in this environment and being creative and having some fun and recognizing we are in the hospitality business music is the very important part of our culture with the leverage that we don't take ourselves too seriously and then innovation is critically important for us always.
Has been youll see in the elevated emphasis on that.
Moving forward as always a fine balance between.
Innovating and complicated right at the operation.
So that's a that's the partnership we have with the franchisees and understanding of how to pace and sequence and do that well.
Hey, Nick This is Jay John I think on the IHOP side are our mission right now high of a new CMO as you are probably familiar with and our mission right now is to unlock the love debt our fans have for IHOP.
Here at all the time, how much they love the brand and love IHOP and we've got to make sure that our marketing and our messaging syncs up to activate that brand love into the that's the bottom line.
And then the follow up given the higher off premise mix given the most complicated menu.
How should we think about sort of at the medium to longer term margin implications.
The the dining room business comes comes back, but we do have the DS incremental layers of sales.
Yeah.
The Nic I think your question is capacity to satisfy that demand is at the question.
The capacity comes back and we have incremental layers of sales around the off premise how does that change the margin dynamic around labor around.
Now we have the less complicated menu.
So the lower food cost how.
How does that permanently benefit the margin structure going forward.
Well one of the interesting dynamics out of.
The pandemic as we saw the off premise average check really escalate.
And while it typically doesn't include the beverage component of the mix.
We saw folks economizing and purchasing and.
And placing.
Additional food items in the refrigerator.
So check has moved north which is good the economic model as of <unk>.
Little different for dine in than it is for the off premise business.
But we find both very attractive.
We look to satisfy our guests regardless of their.
Their need state and there are occasions.
This is very much a revenue game for us and when you see volumes like we've seen of late it flows through very well off premise and on premise. Yes. Net this is Jay same thing for IHOP franchisees.
Sales of King when it comes to making money you gave me of high volume restaurant I'll give you a restaurant makes a lot of money you give me one of the doesn't have very good sales, they're going to struggle. So you're it's like a flywheel at goes and what ends up happening is the sales go up productivity goes up and any of any of these extra sales we can keep.
And then increased our business compared to where we were pre pandemic I think that's going to help overall profitability their share. They are cost we have to overcome we just heard us talk about food cost inflation.
But I think in the Big picture, if we can get sales to maintain at higher levels. Thanks to this off premise business and the demand being there when we come back.
We're fully open and we can get more people in our restaurants than we did before that's auto the positive for profitability just because of the flow through from the top line.
And Nick I would reinforce some of that off premise business.
And in particular, if you are asking about delivery again, we know that guest is willing to pay.
For that convenience, that's important to them and we pass that cost along to the guest our objective has always been to be rather agnostic on.
On premise off premise and margin neutral, regardless of which channel you're talking about sort of franchisees or hole there with one exception that don't typically capture the beverage.
The benefit that would with a dine in occasion.
Thank you very much.
Thank you.
Your next question is from Jeffrey Bernstein from Barclays.
Great. Thank you very much.
Two questions just one on the.
Some of that we focus.
A lot on the sales side I'm, just wondering from a corporate cost standpoint.
You mentioned G&A is of significant leverage opportunity.
The 99% of franchise system, the G&A being the biggest cost on your P&L I'm just wondering how much you think is the normalized spend that you are incurring I know you reiterated 21 guidance, but how should we think about that as a lever going forward.
At the target of $1 or as a percentage of revenues. What do you think that goes or the opportunities that is too to lever that G&A line.
As you mentioned we will.
Really refer back to our guidance range of $160 million 70, and continue to believe that.
And of be in line with the full year end.
Yeah.
Just to let you know we did have.
We're hiring kind of get back to pre pandemic level, we have some travel cost savings currently in the first part of the year, but at that probably will ramp up.
The business and the conditions out.
The industry continues to improve so I would just look to the guidance for now.
Got it but is there any in terms of an outlook as you look at 'twenty, two and beyond whether or not there's opportunities to reduce debt or whether you have of target as a percentage of sales or does it just go one year at a time.
Right now I like to say.
When we're looking at the C with the energy conditions are so I would just look at this year, yes, Geoff it's John Peyton I would say that debt.
Working with the team to conduct.
Really at the top to bottom review of the company that looks at our capital allocation our opportunities for growth. We're also looking at our cost structure. So that's something that is at work in progress in terms of what I think is the long term model for that.
Got you and then you mentioned the cash usage, obviously, you did a big debt pay down in March.
In the release Youre now at the way you calculate at your Leverages sitting at roughly seven turns I'm, just wondering where you target that to go in the short or long term and you mentioned your allocation of options, but just wondering how you prioritize once debt paydown is at more desired levels, how would you prioritize the repurchase versus dividend versus other alternative.
Thank you.
We don't really have a quantitative goal we're in a very strong cash position.
Sharon just a free cash flow. So we're quite happy with where we are at right now in terms of our financial flexibility.
Yes, Geoff it's John I would add debt dine generates a lot of cash we have historically end.
We will continue to do so we as you allude to we got at a history of returning capital to shareholders through a robust dividend and share repurchase programs and our intent is to return to some degree of that program. Our first debt deliberately was was settling of revolver, which we've done.
There's two things that we need to see to to recommit to the dividend. For example, we're still in unprecedented times and we need to know that we settled into the new normal each quarter now is unlike any other quarter end I'd like to see.
The sequential quarters that feel like the new steady state to us where we are confident that we are on the other side of the pandemic implications and as I mentioned before were also looking at the overall view of the company and the AUM.
The overall capital plan that includes not only returning shareholders, but also the investments we need to make to grow as I've been mentioning so those of the two lenses at home with the answer.
Understood at the seven times leverage is something youre comfortable with or is it planned to further pay that down before you consider those options.
I think it's going to improve slightly during the year in terms of the long term, it's part of the analysis, we're doing it.
Look at our capital allocation, so I'd like to take another quarter of two before I give you a target on that yes, we will actually deliver de lever over time.
Okay. Thank you.
Your next question is from Todd Brooks from CL, King and associates.
Hey, Thanks for squeezing me in just a couple of questions John Payne you've been.
Thinking about the Renaissance starting to play out in the restaurant industry end.
I'm wondering if you either at the brand level or at the franchise level.
Can comment on.
At the case for survivor bias is playing out in some of these trends that youre seeing.
Any any updates on competitive closures as you look at the competitive set or the path is the potential driver of of the spike in business that we're seeing near term.
Well I'll interpret Todd survivor bias to it.
A different way, which is I think strong brands win.
In both tough times in good times, and I think because applebees and IHOP are iconic brands that resonate with consumers I think because they both have strong franchise the networks that debt, whether the pandemic and are on board with our brands visions for how to emerge from the pandemic that.
That's why they are doing well as we move forward, yes, there's been something like 17% of the restaurants in this country of closed mostly independence.
But I think it's I think it's because it's the strength of our brands that we had a strong quarter.
Okay, Great and then a follow up question on the <unk>.
Besides of the house.
John you were talking to some about early signs of a comeback in the liquor bar component of the business can you dimensionalize the size at all for US how is that unfolding as the consumers kind of rushing back out for normalized dining experiences and maybe where that liquor bar component is relative to fiscal 19.
Levels would be helpful. Thank you.
Sure the.
So think about let's go back a year.
At the point in time, where the dining rooms were not open we were 100% off premise and therefore alcohol consumption consumption was negligible.
At the exception of some.
Mutual cocktails to go which which is one of the kind of emerging opportunities coming out of the pandemic.
Our mix has historically recent history alcohol been 14% to 15% of total sales.
The off premise business.
<unk> moved from 12% to north of 40% that took a hit but when you look at just dine in year over year, Youll see that that 14% to 15% to 16% mix holding very steady and seeing some indication I wouldnt call of the trend of indulgence.
Sure.
As we come out of this pandemic with.
With guests really.
Enjoying the experience and things like alcoholic beverages, and the appetizers and desserts being ordered with some frequency now.
Perhaps a special occasion that hasn't taken place.
In quite a while we look at the alcohol business and in particular at the late night day, part, which was hardest hit and the pandemic is significant growth opportunity for us and perhaps others.
That's great. Thank you.
Thank you.
Ladies and gentlemen, that's all of the time, we have for Q&A session I'll now turn the call back to Mr. John Peter for those.
No marks.
Hey, Thanks, Christian and thanks, guys for your questions. We appreciate it I do want to correct. One comment I made I mentioned debt.
IHOP had ghost kitchens, and the middle East and I just wanted to clarify that.
That IHOP has ghost kitchens in Dubai, and Applebee's has at ghost kitchen in Kuwait just to be clear there is an applebee's ghost kitchen in the middle East as well.
So thank you all for your questions. We appreciate it. Thank you for staying a little bit past the hour, but it was important to us to make sure that we can answer as many questions as possible and we will talk to you throughout the day in next quarter. Thanks, So much take care.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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