Q2 2024 Earnings Summary
- Applebee's has been outperforming the casual dining category in traffic for three consecutive quarters, due to conservative and strategic pricing by franchisees, with a year-over-year price increase of just 2.6%.
- Applebee's new partnership with the NFL gives them full access to the entire power of the NFL brand, expected to enhance customer engagement and drive traffic, making them the first and only restaurant in the casual dining space to secure such a partnership.
- Fuzzy's Taco Shop has signed agreements for 40 new restaurants in Arizona and Houston, indicating growth potential and confidence in the brand's expansion strategy.
- Dine Brands significantly lowered their same-store sales guidance, now expecting negative 4% to negative 2% comps at Applebee's and negative 2% to 0% at IHOP, down from previous guidance of 0% to 2% and 1% to 3%, respectively, reflecting softening demand and macroeconomic headwinds.
- EBITDA guidance was reduced to $245 million to $255 million from the previous range of $255 million to $265 million, indicating pressure on profitability due to the challenging economic environment.
- IHOP's development plans were scaled back, with expected net new domestic restaurants reduced to 0 to 10 from the prior 15 to 25, due to delays in new store openings and increased closures compared to last year, suggesting challenges in growth and expansion.
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Lowered Same-Store Sales Guidance
Q: Why is Applebee's lowering same-store sales guidance?
A: Management explained that macroeconomic headwinds intensified in June and July, leading to a decrease in same-store sales guidance for Applebee's by 400 basis points. They anticipate these pressures to continue throughout the year and have adopted a conservative approach in their updated guidance. -
Franchisee Health and Profitability
Q: How are franchisees coping with current conditions?
A: The health of the franchise system is relatively steady, though some franchisees are performing better than others. While cost pressures have decreased due to stabilizing labor costs and controlled inflation, top-line pressures remain. Franchisees are actively engaged in value campaigns and profitability initiatives, such as implementing $35 million in annualized system-wide savings, to address these challenges. -
Competitive Environment with Chili's
Q: Is competition from Chili's affecting Applebee's?
A: Management acknowledged aggressive promotions by competitors like Chili's but stated that Applebee's is not losing significant share to any single brand. Their research indicates that external factors like household income and pricing have a more meaningful impact. Applebee's focuses on value offerings to maintain market share and has outperformed the category in traffic during the quarter. -
Pricing Strategy and Value Promotions
Q: What is the approach to pricing and promotions?
A: Applebee's and IHOP emphasize value-oriented promotions without resorting to loss leaders. Franchisees have been cautious with price increases—Applebee's menu pricing rose by 2.6% year-over-year, and IHOP's by 7%. Promotions are designed collaboratively with franchisees to be profitable and attract guests, balancing value offerings with innovative menu items. -
Development Targets and Closures at IHOP
Q: Why were development targets for IHOP adjusted?
A: IHOP adjusted its net development target to 0 to 15 units due to a combination of fewer openings and increased closures. Challenges include construction delays, permitting issues, and lease renewals. Despite this, they plan to open about 40 restaurants this year, which is significant for a 65-year-old brand, and remain optimistic about future development. -
Balance Sheet and Refinancing Plans
Q: How is the company addressing upcoming debt maturities?
A: Management is comfortable and optimistic about the upcoming refinancing due by June 2026. They noted that the Whole Business Securitization market has materially improved, providing confidence in their ability to refinance under favorable conditions. Demand for this type of debt product has deepened, aiding their outlook. -
Macroeconomic Headwinds and Demand Stabilization
Q: How are macroeconomic factors impacting demand?
A: Macroeconomic pressures intensified in June and July, affecting demand across the brands. Management observed that while there was a step down in demand, it has since stabilized and is not getting incrementally worse. They expect similar trends to continue throughout the year, planning accordingly. -
Menu Innovation at Applebee's
Q: What new menu items are being introduced?
A: Applebee's has introduced several new items: the Cheddar & Bacon Skillet, the Whole Lotta Bacon Burger (now a permanent menu item), Crispy Chicken Loaded Fries, and new Hand-Breaded Chicken Sandwiches. More innovation is planned for later this year and into 2025 and beyond, aiming to attract guests with both value and novel offerings. -
NFL Partnership Impact
Q: What is the significance of the NFL partnership?
A: Applebee's has entered into a multiyear partnership with the NFL, granting full access to the NFL's assets and marks. This places Applebee's at the center of NFL promotions, unlike previous peripheral relationships. The partnership is expected to enhance marketing efforts, drive customer engagement, and showcase the playful side of the brand starting in September. -
Labor Inflation
Q: What is the outlook on labor inflation?
A: Labor costs have stabilized and are no longer increasing, although they remain elevated and vary by market. This stabilization is viewed positively. While commodity costs are managed centrally, labor inflation is harder to predict. Franchisees continue to implement profitability initiatives to offset costs elsewhere on their P&L.