IHOP Corp. Reports Strong Third Quarter 2005 Results; Increases Fiscal 2005 Earnings Guidance to $2.15 to $2.20 Per Diluted Share
GLENDALE, Calif.--(BUSINESS WIRE)--Oct. 27, 2005--IHOP Corp. (NYSE:IHP) today announced results for its third quarter and nine months ended September 30, 2005.
IHOP reported an increase of 56.0% in net income to $12.0 million, or an increase of 63.2% in diluted net income per share to $0.62 in the third quarter 2005. IHOP's net income and diluted net income per share comparisons to the prior year were impacted by pre-tax impairment and closure charges of $3.1 million recorded in the third quarter 2004 related to IHOP's strategic repositioning of Company-operated restaurants. Excluding this charge, net income for the third quarter 2005 would have increased 25.4% to $12.0 million, or an increase of 31.9% in diluted net income per share to $0.62. This increase is primarily attributable to a 5.4% reduction in General & Administrative (G&A) expense and a 4.5% reduction in diluted weighted average shares outstanding as a result of the Company's ongoing share repurchase program. IHOP's system-wide same-store sales increase of 4.5% for the third quarter 2005 also contributed to the Company's strong earnings performance.
For the nine months ended September 30, 2005, the Company reported an increase of 48.1% in net income to $34.0 million, or an increase of 56.9% in diluted net income per share to $1.71. IHOP's net income and diluted net income per share comparisons to the prior year were impacted by pre-tax impairment and closure charges of $13.1 million recorded in the first nine months of 2004 related to IHOP's strategic repositioning of Company-operated restaurants. Excluding this charge, net income for the first nine months of 2005 would have increased 11.9% to $34.5 million, or an increase of 18.4% in diluted net income per share to $1.74. This increase is primarily attributable to a 1.1% reduction in G&A expense and a 5.5% reduction in diluted weighted average shares outstanding as a result of the Company's ongoing share repurchase program.
Julia A. Stewart, IHOP's President and Chief Executive Officer, said, "Our strong financial performance for the third quarter 2005 reflects IHOP's ability to effectively leverage our franchise operating model through a combination of same-store sales growth, new restaurant openings and moderate G&A expense. Additionally aided by share repurchase activities, our earnings performance for the year continues to outperform our plan, and, therefore, we are increasing our diluted EPS guidance to range between $2.15 and $2.20 for 2005. This underscores our ability to successfully manage our core franchising business while also optimizing the contribution of the "old model" sources of profitability."
Cash Flows from Operating Activities decreased in the nine months ended September 30, 2005 to $45.4 million compared with $51.8 million in the same period in 2004. This decrease was primarily due to a non-cash charge of $13.1 million in pre-tax impairment and closure charges taken in the first nine months of 2004 as well as a one-time benefit in prepaid expenses in 2004. Capital expenditures were reduced from $11.6 million in the nine months ended September 30, 2004 to $3.5 million in the first nine months of this year, primarily reflecting the Company's business model change.
Performance Highlights
The following are key business highlights for the third quarter 2005 based on IHOP's three strategic objectives: Energize the Brand, Improve Operations Performance and Maximize Franchise Development.
-- Energize the Brand: Supported by IHOP's Funnel Cake Carnival
and French Toast Festival national product promotions,
system-wide same-store sales increased by 4.5% for the third
quarter 2005, and by 2.1% for the first nine months of 2005.
Both promotions effectively leveraged IHOP's core brand
equities around breakfast, and offered strong consumer appeal
that motivated guests to visit IHOP restaurants. Guest traffic
trends returned to positive levels during the third quarter
2005, primarily as the result of this strong promotional
appeal as well as pricing moderation exercised at franchise
restaurants nationwide. In efforts to build IHOP's credibility
at all dayparts, guest acceptance of IHOP's enhanced core menu
continues to be strong as guests also respond positively to
the growing number of IHOP restaurants implementing the
system's new remodel package. Since the beginning of 2005, 158
ICON restaurant remodels have been completed or are underway.
There are an additional 95 restaurant remodels pending
commencement, many of which are expected to be completed by
year end. The Company also rolled out a gift card program to
its more than 1,200 IHOP restaurants nationwide to capture
what IHOP believes will be a significant holiday gift giving
sales opportunity for the system.
-- Improve Operations Performance: The Company evaluates each
franchise operator on an "A" through "F" scale based on a
range of objective criteria including Mystery Shop reports,
operational assessments, participation in training programs,
and the maintenance of required management infrastructure. At
the end of the third quarter 2005, 83% of IHOP's franchisees
were rated an "A" or a "B" based on this rating system. This
reflects an improvement from 66% of IHOP's franchisees rated
as "A" or "B" operators in the third quarter 2004. During the
quarter, IHOP also began to prepare for its second core menu
update this year, which will include the addition of new items
that expand its breakfast menu, as well as the introduction of
contemporary, flavorful offerings for non-breakfast dayparts.
These menu enhancements will roll out system-wide at the end
of November 2005.
-- Maximize Franchise Development: During the third quarter 2005,
IHOP franchisees and its area licensee opened 13 new IHOP
restaurants, compared to 12 restaurants in the same quarter
last year. IHOP also continued to build its pipeline of
franchise development commitments with additional Multi-Store
and Single-Store Development Agreements secured in the third
quarter 2005 for its franchisees to build 46 new IHOP
restaurants over the next 11 years. As of the end of the third
quarter 2005, the Company's franchise pipeline included signed
or optioned commitments to develop a total of 377 new IHOP
restaurants over the next 11 years. Currently, IHOP is
finalizing legal agreements for additional franchise
development that could add up to 51 more IHOP restaurants to
its development pipeline, which brings total signed, optioned
and pending commitments to as many as 428 restaurants.
2005 Guidance Update
IHOP increased its 2005 earnings guidance and expects diluted net income per share for 2005 to range between $2.15 and $2.20 primarily due to reduced G&A expense and increased share repurchase activities during the year. The Company's earning performance outlook also is based on the addition of 62 to 72 new restaurants to the IHOP system this year, and IHOP's expectation that it will generate positive same-store sales growth in the range of 2% to 4% for fiscal 2005. Previously, the Company expected net income per diluted share to range between $2.02 and $2.12 for 2005.
G&A expenses are expected to be at the lower end of IHOP's guidance range of $61 million to $63 million for 2005 as the Company works to moderate G&A growth and improve its operating leverage.
IHOP expects 2005 Cash Flows from Operating Activities to be at the lower end of its guidance range of $55 million to $65 million, while principal receipts from note and equipment contracts receivables are expected to be at the higher end of the $15 million to $20 million range. IHOP revised its Capital expenditures expectation downward to range between $9 million and $11 million in 2005 primarily due to the timing of expenditures associated with the opening of Company-operated restaurants in Cincinnati in 2006, as well as lower than expected remodel costs at refranchised Company-operated restaurants. Previously, the Company expected Capital expenditures to range between $11 million and $13 million for 2005.
Investor Call Today
IHOP will host an investor conference call to discuss its third quarter 2005 results today, Thursday, October 27, 2005 at 10:00 a.m. Eastern Time (7:00 a.m. Pacific Time). To participate on the call, please dial 800-261-3417 and reference pass code 43991274. A live webcast of the call will be available on IHOP's Web site at www.ihop.com, and may be accessed by visiting Conference Calls & Presentations under the site's Investor Information section. 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, November 3, 2005 by dialing 888-286-8010 and referencing pass code 64247735. An online archive of the webcast will also be available on the Investor Information section of IHOP's Web site.
About IHOP Corp.
IHOP, one of America's favorite family restaurants, has been serving a wide variety of breakfast, lunch and dinner selections for nearly 50 years. Famous for serving breakfast all day long, IHOP offers more than 14 types of pancakes as well as omelettes, breakfast specialties, burgers, sandwiches, chicken and steaks. IHOP restaurants are franchised and operated by Glendale, California based IHOP Corp. As of September 30, 2005, the end of IHOP's third quarter, there were 1,218 IHOP restaurants in 48 states and Canada. IHOP Corp. common stock is listed and 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 the Company'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; the Company'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 the Company'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, the Company disclaims any intent or obligation to update these forward-looking statements.
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
--------- -------- -------- ---------
Revenues
Franchise revenues $43,292 $39,094 $124,076 $115,432
Rental income 33,239 32,447 99,083 97,244
Company restaurant sales 3,574 7,509 11,366 26,378
Financing revenues 11,197 7,493 25,508 25,517
--------- -------- -------- ---------
Total revenues 91,302 86,543 260,033 264,571
--------- -------- -------- ---------
Costs and Expenses
Franchise expenses 20,720 18,720 58,371 55,642
Rental expenses 24,633 24,057 73,649 71,182
Company restaurant expenses 3,559 8,031 12,153 28,929
Financing expenses 7,532 3,468 13,676 12,055
General and administrative
expenses 14,881 15,734 42,958 43,414
Other expense, net 760 1,177 3,545 3,495
Impairment and closure charges 84 3,071 885 13,130
--------- -------- -------- ---------
Total costs and expenses 72,169 74,258 205,237 227,847
--------- -------- -------- ---------
Income before income taxes 19,133 12,285 54,796 36,724
Provision for income taxes 7,161 4,612 20,820 13,775
--------- -------- -------- ---------
Net income $11,972 $7,673 $33,976 $22,949
========= ======== ======== =========
Net Income Per Share
Basic $0.62 $0.38 $1.73 $1.10
========= ======== ======== =========
Diluted $0.62 $0.38 $1.71 $1.09
========= ======== ======== =========
Weighted Average Shares
Outstanding
Basic 19,224 20,153 19,660 20,839
========= ======== ======== =========
Diluted 19,394 20,318 19,858 21,021
========= ======== ======== =========
Dividends Declared Per Share
$0.25 $0.25 $0.75 $0.75
========= ======== ======== =========
Dividends Paid Per Share
$0.25 $0.25 $0.75 $0.75
========= ======== ======== =========
IHOP CORP. AND SUBSIDIARIES
RESTAURANT DATA
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------
2005 2004 2005 2004
---------- --------- --------- -------
Restaurant Data
Effective restaurants (a)
Franchise 1,048 992 1,042 986
Company 7 27 8 33
Area license 151 146 150 145
---------- --------- --------- -------
Total 1,206 1,165 1,200 1,164
========== ========= ========= =======
System-wide (b)
Sales percentage change (c) 9.6% 8.3% 6.7% 9.7%
Same-store sales percentage
change (d) 4.5% 5.3% 2.1% 5.6%
Franchise
Sales percentage change (c) 10.5% 11.6% 7.6% 12.9%
Same-store sales percentage
change (d) 4.5% 5.2% 2.1% 5.5%
Company
Sales percentage change (c) (52.4)% (62.1)% (56.9)% (56.6)%
Area License
Sales percentage change (c) 12.4% 12.7% 11.3% 13.8%
-----------
(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. 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) System-wide sales are retail sales of IHOP restaurants
operated by franchisees, area licensees and the Company, as
reported to the Company. Franchise restaurant sales were
$460.1 million and $1,331.2 million for the third quarter and
first nine months of 2005, respectively, and sales at area
license restaurants were $47.1 million and $143.7 million for
the third quarter and first nine months of 2005, respectively.
Sales of restaurants that are owned by franchisees and area
licensees are not attributable to the Company.
(c) "Sales percentage change" reflects, for each category of
restaurants, the percentage change in sales in any given
fiscal period compared to the prior fiscal period for all
restaurants in that category.
(d) "Same-store sales percentage change" reflects the percentage
change in sales, in any given fiscal period compared to the
prior fiscal period, for restaurants that have been operated
throughout both fiscal periods that are being compared and
have been open for at least 18 months. Because of new unit
openings and store closures, the restaurants open throughout
both fiscal periods being compared will be different from
period to period. Same-store sales percentage change does 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,
------------------ -----------------
2005 2004 2005 2004
---------- ------- --------- -------
Restaurant Development Activity
Beginning of period 1,207 1,167 1,186 1,165
New openings
Company-developed -- -- 2 3
Franchisee-developed 12 11 34 18
Area license 1 1 4 4
---------- ------- --------- -------
Total new openings 13 12 40 25
Closings
Company and franchise (2) (11) (8) (22)
Area license -- -- -- --
---------- ------- --------- -------
End of period 1,218 1,168 1,218 1,168
========== ======= ========= =======
Summary-end of period
Franchise 1,062 1,001 1,062 1,001
Company 4 21 4 21
Area license 152 146 152 146
---------- ------- --------- -------
Total 1,218 1,168 1,218 1,168
========== ======= ========= =======
Restaurant Franchising Activity
Company-developed -- 2 3 6
Franchisee-developed 12 11 34 18
Rehabilitated and refranchised 13 5 18 16
---------- ------- --------- -------
Total restaurants
franchised 25 18 55 40
Reacquired by the Company (6) (3) (14) (6)
Closed (2) (4) (7) (12)
---------- ------- --------- -------
Net addition 17 11 34 22
========== ======= ========= =======
IHOP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $28,084 $44,031
Marketable securities 12,471 14,504
Other current assets 44,451 48,079
------------- ------------
Total current assets 85,006 106,614
Property and equipment, net 317,212 326,848
Long-term receivables:
Notes receivable 33,752 39,841
Equipment leases receivable 168,765 172,927
Direct financing leases receivable 121,672 124,410
Other long-term assets 60,227 51,037
------------- ------------
Total assets $786,634 $821,677
============= ============
Current liabilities:
Accounts payable $13,700 $17,133
Accrued expenses 20,341 20,551
Other current liabilities 16,135 12,669
------------- ------------
Total current liabilities 50,176 50,353
Long-term debt 132,208 133,768
Other long-term liabilities 297,997 297,792
Stockholders' equity 306,253 339,764
------------- ------------
Total liabilities and stockholders' equity $786,634 $821,677
============= ============
IHOP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2005 2004
-------- --------
Cash flows from operating activities
Net income $33,976 $22,949
Adjustments to reconcile net income to cash flows
provided by operating activities:
Depreciation and amortization 14,960 13,867
Impairment and closure charges 885 13,130
Changes in current assets and liabilities (1,524) 4,778
Other (2,864) (2,885)
-------- --------
Cash flows provided by operating
activities 45,433 51,839
Cash flows from investing activities
Additions to property and equipment (3,476) (11,601)
Redemption of marketable securities 2,033 16,955
Proceeds from sale of land and building 890 1,472
Principal receipts from long-term receivables 14,387 15,870
Other (2,176) (1,084)
-------- --------
Cash flows provided by investing
activities 11,658 21,612
Cash flows from financing activities
Dividends paid (14,862) (15,748)
Purchase of treasury stock (56,417) (57,677)
Other (1,759) (250)
-------- --------
Cash flows used in financing activities (73,038) (73,675)
-------- --------
Net change in cash and cash equivalents (15,947) (224)
Cash and cash equivalents at beginning of period 44,031 27,996
-------- --------
Cash and cash equivalents at end of period $28,084 $27,772
======== ========
IHOP CORP. AND SUBSIDIARIES
RECONCILIATION OF NET INCOME EXCLUDING IMPAIRMENT AND CLOSURE
CHARGES AND GAIN ON SALE OF REAL ESTATE
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
--------- -------- -------- --------
Net income, as reported $11,972 $7,673 $33,976 $22,949
Impairment and closure charges 84 3,071 885 13,130
Gain on sale of real estate -- -- -- (485)
Income tax benefit (31) (1,152) (336) (4,742)
--------- -------- -------- --------
Net income excluding impairment
and closure charges and gain on
sale of real estate $12,025 $9,592 $34,525 $30,852
========= ======== ======== ========
Basic net income per share:
Net income, as reported $0.62 $0.38 $1.73 $1.10
Impairment and closure charges 0.01 0.15 0.05 0.63
Gain on sale of real estate -- -- -- (0.02)
Income tax benefit -- (0.05) (0.02) (0.23)
--------- -------- -------- --------
Net income excluding impairment
and closure charges and gain on
sale of real estate $0.63 $0.48 $1.76 $1.48
========= ======== ======== ========
Diluted net income per share:
Net income, as reported $0.62 $0.38 $1.71 $1.09
Impairment and closure charges -- 0.15 0.05 0.62
Gain on sale of real estate -- -- -- (0.02)
Income tax benefit -- (0.06) (0.02) (0.22)
--------- -------- -------- --------
Net income excluding impairment
and closure charges and gain on
sale of real estate $0.62 $0.47 $1.74 $1.47
========= ======== ======== ========
CONTACT: IHOP Corp.
Stacy Roughan (Investor Relations), 818-637-3632
SOURCE: IHOP Corp.