IHOP Corp. Reports Third Quarter 2004 Results
GLENDALE, Calif.--(BUSINESS WIRE)--Oct. 21, 2004--
Company Updates Performance Guidance Due to the
Continued Strength of its Core Business;
Business Model Transition on Track for Year-End 2004 Completion
IHOP Corp. (NYSE:IHP) today announced results for its third quarter and nine months ended September 30, 2004.
IHOP reported a 30.5% decrease in net income to $7.7 million, or a decrease of 25.5% in diluted earnings per share to $0.38 in the third quarter 2004. During the quarter, IHOP's net income and diluted net earnings per share performance was impacted by pre-tax impairment and closure charges of $3.1 million related to the Company's strategic repositioning of Company-operated restaurants previously announced on July 22, 2004. Excluding these charges, net income for the third quarter 2004 would have decreased 13.1% to $9.6 million, or a decrease of 7.8% in diluted net income per share to $0.47. This decrease is attributable to the reduction in the number of IHOP-developed restaurants franchised in the third quarter 2004 versus the third quarter 2003 as the Company completes the transition to its new business model.
For the nine months ended September 30, 2004, the Company reported a decrease of 18.0% in net income to $22.9 million, or a decrease of 15.5% in diluted net income per share to $1.09. For the nine months ended September 30, 2004, IHOP's net income and diluted net earnings per share performance was impacted by pre-tax impairment and closure charges of $13.1 million related primarily to its repositioning of Company-operated restaurants.
Systemwide same-store sales increased by 5.3% in the third quarter, reflecting, among other things, the positive impact of IHOP's Paradise Pancakes and Never Ending Popcorn Shrimp product promotions featured during the quarter. For the nine months ended September 30, 2004, same-store sales increased by 5.6%.
"We are pleased with our performance for the quarter and year-to-date as we continue to produce terrific same-store sales results through proven marketing and operations initiatives IHOP has established over the past seven quarters," said Julia A. Stewart, IHOP's President and Chief Executive Officer. "During this time of growth for our core business, we are also pleased to report that we have remained on track to successfully complete our two-year business model transition by the end of 2004, and we are well positioned to capture all of the benefits we originally envisioned for IHOP and for our shareholders with this shift.
"Reaching our `steady state' operating model early next year includes unit growth driven almost exclusively by franchisee-funded development of approximately 60 new IHOP restaurants per year. Same-store sales growth is expected to continue as we encourage our guests to visit IHOP more often, providing improved operations, enticing new menu offerings and appealing promotions. All of this will lead to continued generation of significant free cash flow," Stewart said.
Cash flow from operations decreased slightly through the nine months ended September 30, 2004, to $51.8 million compared to $55.0 million in the same period last year. Capital expenditures were reduced significantly from $65.0 million during the first nine months of 2003 to $11.6 million for the same period in 2004, reflecting the shift to franchisee-funded development of new IHOP restaurants.
Systemwide sales increased 8.3% in the third quarter and 9.7% for the nine months ended September 30, 2004, over the same periods in 2003. The sales increase is primarily the result of an increase in average sales per effective restaurant and growth in the number of effective restaurants. Average sales per effective restaurant increased 6.1% in the third quarter and 5.8% for the nine months ended September 30, 2004, over the same periods in 2003. Effective restaurants grew by 2.0% in the third quarter and 3.6% for the first nine months of 2004 over the same periods last year.
Third Quarter 2004 Highlights
The following are key business highlights for the third quarter 2004:
-- The Company made excellent progress in executing its plan to
strategically reposition Company-operated restaurants,
reducing the number of Company-operated restaurants to 21 as
of the end of the third quarter 2004 versus 32 restaurants at
the end of the second quarter 2004. IHOP expects to
refranchise all but three of its existing Company-operated
restaurants by the end of the first quarter 2005.
-- IHOP hired Carolyn O'Keefe as its new Chief Marketing Officer
during the quarter. Under O'Keefe's leadership, the Company
expects to build upon its successful advertising campaign and
bring an added level of sophistication and execution to its
marketing efforts. IHOP's goal is to develop a fully
integrated brand positioning and deliver an authentic,
warmhearted and welcoming experience every time a guest
interacts with IHOP.
-- The Company has eliminated most of the lowest rated franchise
operators from its system, and continues to make progress in
moving average franchise operators to superior or excellent
status.
-- IHOP has made significant progress in transitioning to its new
business model in which franchisees finance the development of
new IHOP restaurants. As of September 30, 2004, the Company
has secured commitments for its franchisees to build 241 new
IHOP restaurants over the next 11 years.
-- In September 2004, IHOP hosted close to 1,000 franchisees,
operators, vendor partners and employees for its most
important gathering of the year, the National Franchise
Conference. Focused on the theme of "Delivering the Promise,"
the three-day event included presentations, interactive
breakouts and social functions that celebrated the success of
2004, laid the foundation for an exciting 2005, and provided a
clear understanding of the Company's strategy, direction and
vision of the IHOP brand to its key stakeholders.
-- More recently, the Editorial Board of Nation's Restaurant
News, one of the leading restaurant publications, selected
IHOP and its Chief Executive Officer, Julia Stewart, as Golden
Chain Award Winner for 2004. The Golden Chain Award honors
outstanding multi-unit foodservice executives, celebrating the
recipients' recent accomplishments and career achievements.
The award was presented to IHOP at the 45th Annual Multi-Unit
Foodservice Operators (MUFSO) conference.
2004 Guidance Update
The Company is updating its 2004 performance guidance due to the continuing strength of its core business and momentum in the marketplace. IHOP now expects fiscal 2004 net income to range between $1.45 and $1.55 per diluted share, including the effect of the previously announced Company-operated restaurant repositioning write-off of $13 million to $14 million in 2004. Excluding the effect of the write-off, the Company expects fiscal 2004 net income to range between $1.85 and $1.95 per diluted share. Previously, IHOP's guidance had been that net income for fiscal 2004 would range between $1.40 to $1.50 per diluted share including the effect of the write-off, and between $1.80 and $1.90 per diluted share excluding the effect of the write-off.
IHOP also is raising its expectations for cash flow from operations to range between $60 million to $65 million for 2004, from the Company's previous guidance of $50 million to $55 million, due to the continuing strength of its core business as well as improvements in receivables collection.
Additionally, IHOP is updating its expectations for capital expenditures for 2004 to range between $13 million and $16 million due primarily to higher than anticipated capital expenses associated with the development and testing of IHOP's new remodel package and expenditures associated with IHOP-developed restaurants opened prior to 2004. Previously, the Company's guidance had been that capital expenditures for fiscal 2004 would be on the higher end of its $10 million to $15 million range.
Investor Conference Call Today
IHOP will release full financial results for the third quarter 2004 on Thursday, October 21, 2004, before the market opens. The Company will host an investor conference call to discuss its third quarter 2004 results on Thursday, October 21, 2004, at 11:00 a.m. ET (8:00 a.m. PT). To participate on the call, please dial 866-800-8652 and reference pass code 78198313. A live webcast of the call may be accessed on the Investor Information section of IHOP's Web site at www.ihop.com. Participants should allow approximately ten minutes prior to the call's start time to visit the site and download any streaming media software needed to listen to the webcast. A telephonic replay of the call may be accessed through Thursday, October 28, 2004, by dialing 888-286-8010 and referencing pass code 55693978. An online archive of the webcast will also be available on the Investor Information section of IHOP's Web site.
About IHOP Corp.
The IHOP family restaurant chain has been serving a wide variety of breakfast, lunch and dinner selections for more than 45 years. Offering more than 16 types of pancakes, as well as omelettes, breakfast specialties, burgers, sandwiches, chicken and steaks, IHOP's diverse menu appeals to people of all ages. IHOP restaurants are operated and franchised by Glendale-based IHOP Corp. As of September 30, 2004, the end of IHOP's third quarter, there were 1,168 IHOP restaurants in 48 states and Canada. IHOP is publicly traded on the NYSE under the symbol "IHP." For more information, call the Company's headquarters at 818-240-6055 or visit the Company's Web site located at www.ihop.com.
Forward-Looking Statements
There are forward-looking statements contained in this news release. They use such words as "may," "will," "expect," "believe," "anticipate," "plan" or other similar terminology. These statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results to be materially different than those expressed or implied in such statements. These factors include, but are not limited to: risks associated with the implementation of the Company's strategic growth plan, the availability of suitable locations and terms of the sites designated for development; the ability of franchise developers to fulfill their commitments to build new IHOP restaurants in the numbers and time frames covered by their development agreements; the ability of the Company to franchise its remaining Company-operated restaurants; legislation and government regulation, including the ability to obtain satisfactory regulatory approvals; conditions beyond IHOP's control such as weather, natural disasters, or acts of war or terrorism; availability and cost of materials and labor; cost and availability of capital; competition; continuing acceptance of the International House of Pancakes brand and concepts by guests and franchisees; IHOP's overall marketing, operational and financial performance; economic and political conditions; adoption of new, or changes in, accounting policies and practices; and other factors discussed from time to time in IHOP's filings with the Securities and Exchange Commission. Forward-looking information is provided by IHOP pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these factors. In addition, IHOP disclaims any intent or obligation to update these forward-looking statements.
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 2004
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
---------- -------- --------- ---------
Revenues
Franchise revenues $39,094 $35,761 $115,432 $104,269
Rental income 32,447 29,581 97,244 86,888
Company restaurant sales 7,509 19,818 26,378 60,827
Financing revenues 7,493 19,602 25,517 50,053
---------- -------- --------- ---------
Total revenues 86,543 104,762 264,571 302,037
---------- -------- --------- ---------
Costs and Expenses
Franchise expenses 18,262 16,267 54,857 47,629
Rental expenses 24,057 21,718 71,182 63,857
Company restaurant expenses 8,031 21,485 28,929 64,886
Financing expenses 3,926 11,335 12,840 28,036
General and administrative
expenses 15,734 12,744 43,414 38,573
Other (income) expense, net 1,177 971 3,495 3,280
Impairment and closure charges 3,071 1,469 13,130 2,386
Reorganization charges -- 1,104 -- 8,624
---------- -------- --------- ---------
Total costs and expenses 74,258 87,093 227,847 257,271
---------- -------- --------- ---------
Income before income taxes 12,285 17,669 36,724 44,766
Provision for income taxes 4,612 6,625 13,775 16,787
---------- -------- --------- ---------
Net income $7,673 $11,044 $22,949 $27,979
========== ======== ========= =========
Net Income Per Share
Basic $0.38 $0.51 $1.10 $1.30
========== ======== ========= =========
Diluted $0.38 $0.51 $1.09 $1.29
========== ======== ========= =========
Weighted Average Shares
Outstanding
Basic 20,153 21,497 20,839 21,443
========== ======== ========= =========
Diluted 20,318 21,721 21,021 21,623
========== ======== ========= =========
Dividends Declared Per Share $0.25 $0.25 $0.75 $0.50
========== ======== ========= =========
Dividends Paid Per Share $0.25 $0.25 $0.75 $0.50
========== ======== ========= =========
IHOP CORP. AND SUBSIDIARIES
RESTAURANT DATA
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2004 2003 2004 2003
--------- --------- ----------- -----------
Restaurant Data
Effective restaurants (a)
Franchise (b) 992 926 986 908
Company 27 76 33 77
Area license (b) 146 140 145 139
--------- --------- ----------- -----------
Total 1,165 1,142 1,164 1,124
========= ========= =========== ===========
Systemwide
Sales (c) $466,118 $430,273 $1,392,507 $1,269,631
Percent change 8.3% 15.0% 9.7% 14.7%
Average sales per
effective restaurant $400 $377 $1,196 $1,130
Percent change 6.1% 5.9% 5.8% 5.6%
Same-store sales
percentage change (d) 5.3% 4.7% 5.6% 4.4%
Franchise (b)
Sales $416,481 $373,058 $1,237,460 $1,095,721
Percent change 11.6% 15.9% 12.9% 15.4%
Average sales per
effective restaurant $420 $403 $1,255 $1,207
Percent change 4.2% 4.9% 4.0% 4.9%
Same-store sales
percentage change (d) 5.2% 4.6% 5.5% 4.2%
Company
Sales $7,509 $19,818 $26,378 $60,827
Percent change (62.1)% 0.9% (56.6)% 9.8%
Average sales per
effective restaurant $278 $261 $799 $790
Percent change 6.5% 3.6% 1.1% 6.9%
Area License (b)
Sales $42,128 $37,397 $128,669 $113,083
Percent change 12.7% 13.8% 13.8% 10.7%
Average sales per
effective restaurant $289 $267 $887 $814
Percent change 8.2% 10.3% 9.0% 6.8%
(a) "Effective restaurants" are the number of restaurants in a given
fiscal period adjusted to account for restaurants open for only
a portion of the period. It is calculated by dividing total
restaurant operating days by 91 days for a quarterly calculation.
Information is presented for all effective restaurants in the IHOP
system, which includes IHOP restaurants owned by the Company as
well as those owned by franchisees and area licensees.
(b) IHOP historically reported restaurants in Canada as franchise
restaurants although the restaurants were operated under an area
license agreement. Beginning with 2004, Canadian restaurants will
be reported as "Area License." Prior-year information has been
restated to conform to the current-year presentation.
(c) "Systemwide sales" are retail sales of franchisees, area licensees
and Company-operated restaurants, as reported to IHOP. Sales of
restaurants that are owned by franchisees and area licensees are
not attributable to the Company. However, we believe that
presentation of this information is useful in analyzing our
revenues because franchisees and area licensees pay us royalties
that are generally based on a percentage of their sales, as well
as rental payments under leases that generally include a component
that is based on a percentage of their sales.
(d) "Same-store sales percentage change" reflects the percentage
change in sales for restaurants that have been operated for the
entire fiscal period in which they are being compared and have
been open for at least 18 months. Because of new unit openings and
store closures, the restaurants opened for an entire fiscal period
being compared will be different from period to period. Same-store
average sales do not include data on restaurants located in
Florida.
IHOP CORP. AND SUBSIDIARIES
RESTAURANT DEVELOPMENT AND FRANCHISING ACTIVITY
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
-------- --------- -------- --------
RESTAURANT DEVELOPMENT ACTIVITY
IHOP-beginning of period 1,167 1,136 1,165 1,103
New openings
IHOP-developed -- 12 3 45
Franchisee-developed (a) 11 1 18 7
Area license 1 4 4 4
-------- --------- -------- --------
Total new openings 12 17 25 56
Closings
Company and franchise (11) (4) (22) (10)
Area License -- -- -- --
-------- --------- -------- --------
IHOP-end of period 1,168 1,149 1,168 1,149
======== ========= ======== ========
Summary-end of period
Franchise (a) 1,001 940 1,001 940
Company 21 68 21 68
Area license (a) 146 141 146 141
-------- --------- -------- --------
Total IHOP 1,168 1,149 1,168 1,149
======== ========= ======== ========
RESTAURANT FRANCHISING ACTIVITY
IHOP-developed 2 21 6 51
Franchisee-developed (a) 11 1 18 7
Rehabilitated and refranchised 5 4 16 6
-------- --------- -------- --------
Total restaurants
franchised 18 26 40 64
Reacquired by IHOP (3) (4) (6) (10)
Closed (4) (2) (12) (4)
-------- --------- -------- --------
Net addition 11 20 22 50
======== ========= ======== ========
(a) IHOP historically reported restaurants in Canada as franchise
restaurants although the restaurants were operated under an area
license agreement. Beginning with 2004, Canadian restaurants will
be reported as "Area License." Prior-year information has been
restated to conform to the current-year presentation.
IHOP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2004 2003
--------------- --------------
(Unaudited)
Current assets $102,517 $127,081
Property and equipment, net 304,899 314,221
Long-term receivables:
Notes receivable 40,745 49,470
Equipment contracts receivable 173,098 174,737
Direct financing leases receivable 127,771 129,829
Other assets 51,533 47,666
--------------- --------------
Total assets $800,563 $843,004
=============== ==============
Current liabilities $47,414 $45,373
Long-term debt 138,157 139,615
Other long-term liabilities 277,535 275,656
Stockholders' equity 337,457 382,360
--------------- --------------
Total liabilities and stockholders'
equity $800,563 $843,004
=============== ==============
IHOP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2004 2003
------------ -------------
Cash flows from operating activities
Net income $22,949 $27,979
Adjustments to reconcile net income to
cash flows provided by operating
activities:
Depreciation and amortization 13,867 13,827
Impairment and closure charges 13,130 2,386
Reorganization charges - 5,534
Changes in current assets and
liabilities 4,778 4,873
Other (2,885) 413
------------ -------------
Cash flows provided by operating
activities 51,839 55,012
------------ -------------
Cash flows from investing activities
Additions to property and equipment (11,601) (64,993)
Redemption and purchase of marketable
securities, net 16,955 (43,713)
Principal receipts from long-term
receivables 15,870 11,737
Other 388 (11,161)
------------ -------------
Cash flows provided by (used in)
investing activities 21,612 (108,130)
------------ -------------
Cash flows from financing activities
Proceeds from sale and leaseback
arrangements - 12,618
Dividends paid (15,748) (10,771)
Purchase of treasury stock (57,677) (16,852)
Other (250) 5,054
------------ -------------
Cash flows used in
financing activities (73,675) (9,951)
------------ -------------
Net decrease in cash and cash equivalents (224) (63,069)
Cash and cash equivalents at beginning of
period 27,996 98,739
------------ -------------
Cash and cash equivalents at end of period $27,772 $35,670
------------ -------------
CONTACT: IHOP Corp.
Stacy Roughan, 818-637-3632
SOURCE: IHOP Corp.