Dine Brands Global, Inc. (DIN) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst here at Barclays. I hope everyone had a good lunch. Our next fireside chat is with Dine Brands. With us on stage from Glendale, California, we have John Peyton immediately to my left, you're right, the CEO; Vance Chang, the CFO. And in the audience, we have Matt Lee, who's the SVP of Finance and IR. By way of background, for those not familiar, Dine is a portfolio company. I guess as you've heard of a couple of these brands, Applebee's has 1,550 units. IHOP has 1,800 units. They also own Fuzzy Tacos, where they have just over 100 units. And that portfolio within those numbers includes 200 and some odd units outside of the U.S. But Dine Brands is effectively a franchise business. So the Applebee's, IHOP and Fuzzy Taco are run by franchisees. We do have the largest square footage Applebee's directly across the street if anybody wants to grab something after work today, right on 49th between 7th and Broadway, which I know is popular here at Barclays. I have some questions, which I'm going to pose to management, but then I will definitely pause near the end. And if there are any questions from the audience, we will take them then. But with that said, we want to thank John and Vance for joining us and look forward to our conversation.

Welcome.

Thank you. Thank you for having us.

Absolutely. Being that you do have two of the largest restaurant brands in the world within casual dining and family dining, I should say, I think you have a pretty good pulse on the consumer. So I just wanted to start with a couple of bigger picture questions. We get a lot of restaurants that are talking about the consumer more broadly, which I'd love to hear your view. But also within that, over the past couple of quarters, there's been lots of talk of maybe individual cohorts, certain income levels, certain age groups, certain ethnicities that maybe are performing better or worse than others. So wondering, one, your view on the consumer; and two, whether you've seen any divergent change in trend among any of the different cohorts that you focused on?

Yes, the consumer state of mind has been fairly consistent, I would say, over the last 6 or 8 quarters. The first big change we saw was in 2024, our guests and guests in general, wanted to know what the full cost of the meal was. So for example, Applebee's for years and years and years had historically been promoting some version of a discount on an appetizer. While you can eat this, $0.50 wings, half off that. But by '24, when inflation took that big jump, they wanted to know what's going to cost for the burger, the fries and the soda. And you saw everyone across all categories, quick serve, select-serve and us, all putting together these everyday value menus where they knew the full cost. This year, specifically at Applebee's and IHOP, the behavior of our guests is the same, so I can speak for both brands. Number one, in the last 2 quarters, we're seeing a greater movement of higher-income guests into our brands. And we define that as over $100,000 a year in household income. And we've also seen some guests leaving us at the lower end of the income band. Those guests tend to be Gen Zs and also earning under $50,000. The good news for our 2 brands is that we've had more joining us from the top of the funnel than leaving us, which is why both brands have grown traffic this year. So it's a bit of a mixed data points, right? We've grown traffic, yet we do know that the guest is feeling more stressed than in the past. And when they're with us, Jeff, Applebee's has an everyday portion of its menu, value menu that's called 2 for $25. So it's an appetizer and 2 entrees for $25. About 1/3 of our tickets contain that item, which is as high as it's been, but steady now for several quarters. On the IHOP side, we've just recently introduced everyday value, which is 4 full entrees for $6 or $7 on the coast. It's brand new, so I don't think we have a stable number yet, but it's growing up towards 20% after just a quarter or 2.

Yes. I've seen a fair amount of the commercials for the IHOP -- the advertisements does look like a very compelling offer for $6 to have a full meal. So I would assume that's going to drive traffic. We also get a lot of questions just about food at home versus food away from home, especially in this environment where over the past couple of years, supermarkets have raised prices, restaurants have raised prices, the debate of who's raised more, maybe sending consumers more to at-home or more to away from home. Just wondering how you think about your restaurants and the industry positioning from that value perspective as we battle food at home versus food away from home?

Yes. So it's important to keep in mind, because we're 98% franchised, we don't establish the pricing, but we can report on in the aggregate, what our franchisees have done. If you look at Applebee's since COVID, right, which seems to be the reference point for everyone, Applebee's has raised prices less over the last 5 years than the comp set has and less than dining at home. IHOP has raised prices a bit more than the comp set and a bit more than dining at home, yet we're seeing both brands grow their traffic. To your point, I think a big part of that for IHOP, especially where they took more price is this everyday value, this everyday value menu. So IHOP is an almost 68-year-old brand and interestingly, has never had an everyday value portion of its menu, except for its over 55 -- age 55, which is supposed to be the senior menu. I'm 58. I find it highly insulting that 55 is considered the senior menu, raise that age exactly. But now they have this everyday value, that seems to be a compelling offer that our guests are looking for right now, and it's making up a bit for that issue.

When I think about IHOP, and we've had others here that focus more on breakfast than brunch, I know IHOP has a full day menu. But do you find that IHOP is more vulnerable? Breakfast seems to be a daypart that some consumers say, I can pull back on eating out breakfast. It's easy to replicate at home. Do you see any change in behavior IHOP versus Applebee's from that perspective?

So again, coming out of COVID, the last daypart to recover was weekday breakfast to your point. And weekday breakfast is still not at the pre-COVID levels. It's in the mid-90s. The brand overall for in-restaurant dining is getting close to 100%, but not quite there, 100% of what it had before. Where they make up for it and why the traffic is growing is both brands have grown their off-premise business. So pre-COVID, Applebee's and IHOP, off-prem was 6%, 7%, 8% of sales. Now it's 20% for IHOP and 22%, 23% for Applebee's. And that's largely a new incremental customer because most of that off-prem business does not dine in with us. So we became part of the off-prem consideration set during COVID and have maintained that business since.

And when I look at our coverage universe of casual diners at least, they are all company-owned and operated with the exception of being all franchised. I'm wondering whether that might be the answer to this question. But as you meet with investors, like what question are you surprised you don't get or the question you get that maybe you think the company is misunderstood. Clearly, when I talk to investors, they just say, they're all on casual dining. But you are more like a QSR in reference to the ownership model, more like a casual diner or a family diner in terms of the product you're selling and the experience. So I'm just wondering whether that is and just how you address those questions.

Yes. Jeff, the thing that we really want to make sure investors understand is that because we're franchised, we're asset-light. So that's a different margin profile, that's a different cash flow profile. That's also a different capital structure, right? Because we're franchised allows us to have access to whole business securitization, which is investment-grade cost of capital. It's higher leverage -- allows us to have higher leverage, lower cost of capital and covenant light. And so it's not -- we can't look at our capital structure as apples-to-apples versus other company-owned concepts in our segment. And the other thing I would point out is that, again, because we're highly franchised, we're actually a lot bigger than people realize. So the two brands combined, we do about $8 billion in system sales a year. And I think we go through about $2 billion a year in terms of the supply chain goods and services that we purchase with our franchisees on behalf of our franchisees. And so if you look at the supply chain benefit, the cost of capital benefit, the scale benefit in terms of our marketing campaigns is much bigger than people realize than our market cap would indicate.

And to your point, investors sometimes lump us more often than not in with the wholly owned restaurants, brands and companies and don't appreciate the different model in terms of the cash we generate, the margin that we have, et cetera. That is the #1 question or conversation we have with people are just walking them through...

We've asked that question several times, but the fact that, right...

To have $8 billion in system sales, but then when you're just taking a royalty off of that, it's a much higher margin percentage, but it's a much lower margin dollars. Therefore, your market cap tends to be smaller because it's just what you're bringing in. So it requires a little bit of handholding. But clearly, there are positives and negatives to both sides of things.

My last question from a broader industry perspective, GLP-1s get a lot of attention or did a couple of years ago. That trend really seemed to have slowed down. We didn't hear much about it over the past year. It seems to be ramping up again, whether it's because it's become more affordable or covered by insurance potentially or in a soluble pill form. It just seems like it's the most formidable challenge the restaurants have from a diet or fat perspective. I'm just wondering what data you look at, whether it's something you see as something you can address or it's a concern over the next few years?

So to date, we haven't seen a notable impact on our business. But as you said, we're certainly aware of the way it's changing in terms of -- and how available it may become, particularly for our guests, right, where as it becomes more affordable. So we sort of think about it 2 ways. One is, yes, from an innovation standpoint and from a menu standpoint, we're thinking about higher protein entrees. We're thinking about smaller portions. We're thinking about lower calorie entrees and just as -- to anticipate the demand for that. But at the same time, it's also important to keep in mind that many of the reasons to come to Applebee's or IHOP are special occasion. And we're also not -- we're not fast food, right? And we're not fast casual. It's not an everyday thing, every day at lunch thing. So people come to have a date night. They come because the Little League team won. They come after church. And so I don't think the occasion of dining out and human beings want to come together to celebrate and be together changes even with the weight loss drugs, although we do need to make sure that we're not vetoed by someone who's got that point of view.

Yes. Jeff, the other thing is that if you think about this, IHOP has been 60, 65 years old. Applebee's is 50-some-odd years old. We've been through so many cycles of other dietary sort of facts before. And so again, to John's point, the way people view us, the way people interact with us has been so consistent over many, many cycles. And we have yet to see any sort of evidence otherwise.

Yes. Right. And with only a few weeks left in 2025, obviously, you guys are looking to 2026. I'm just wondering what are you most excited about for Dine Brands as we think about the next 12 months relative to 2025?

We're most excited about what we call dual brands, which is our big idea. So we have a product now where we have Applebee's and IHOP in the same restaurant. So it's the same square foot. Imagine an IHOP adding an Applebee's or an Applebee's adding an IHOP. When you enter the restaurant, there's the red side and the blue side and guests can co-mingle and eat on either side. We have one combined menu. So it's an all-day dining menu that goes from breakfast through late night. So sort of the IHOP blue to the red part of the menu. And we've got 40 open outside the U.S. and we brought it to the U.S. for the first time this year in San Antonio, we opened one in February. We'll have 30 by the end of the year and we'll have another 50 that we can see line of sight to in next year. And the economics of it are what are so compelling, Jeff. So it's adding 1.5x to 2.5x the revenue when you add the second brand into the box. And that incremental revenue flows at 30% to 40% because there's -- the fixed costs are the same. The guests love it. And even when you look at dayparts, the off brand, so Applebee's in the morning, IHOP in the evening, never sell less than 15%. So at 10:30, people are ordering steak and ribs in the morning. And at night, they're ordering pancakes and omelets. And so the franchisees are intrigued by it because of the improved economics. Guests are enjoying the best of both brands. And clearly, it's good for us because it fuels unit growth as well as royalty revenue for us. And it also helps us even rescue some closures, right? In a system our size, you've got 1% to 2% of restaurants that close every year because they built themselves 30 years ago, the contract is ending or maybe they're not as profitable as they once were. A lot of them are adding this brand in order to -- the second brand in order to keep going. So go ahead.

Jeff. The best way to experience it is to be there. But short of that, I do encourage investors to check out our website. We have a video on our website that gives you a sense of what it feels like to be inside of our restaurants. You get to see a glimpse of the menu, how the guest experience will be like, and it's really the best way to know what we're talking about.

And what's unique about it from a strategic standpoint, right, is it's -- not only is it a big idea, it's hard to replicate. So 20 years ago, IHOP happened to buy Applebee's and create Dine brands. And we happen to be the only company that owns a premier AM brand and a premier PM brand. And when you put those 2 together, you're programming all 4 dayparts without cannibalizing one or the other. So we uniquely are able to do that, and it's a competitive advantage, right? It's a pretty high walled garden.

I think about the years of looking at this space, I think of Dunkin who has Baskin and they tried that and I thought it was a home run and yet most franchisees ultimately said, you know what, we want to be one or the other. So it's an interesting dynamic.

Yes. And there have been other combinations of fast food like KFC and things like that. But the issue there was they were all -- they were the same daypart competing with one another, where this is purely additive. Applebee's does not serve breakfast today. IHOP has opened 24/7 or 24/2, but dinner is its historically weakest daypart. So to be able to add Applebee's to dinner makes a big difference for them.

By the way, so now IHOP gets to serve mimosas and Bloody Marys in the morning when we couldn't do that before because of the liquor license.

Got you. So if I walked into one and I got a combined menu for the two. So I can say on either side, look at a menu that has some of each item. But if I ordered a burger, which both of your brands have and then said I wanted a short -- I mean you could just -- they can do it whatever you want it, and they have chefs that can just handle it all.

Yes. For those of you who are from the Northeast, it's like a diner, right? It's an all-day dining menu. And we have settled cues like the earlier daypart of the menu is more blue and the later daypart is more red and a nod to both of the brands. But it's exactly that. And people are literally mixing and matching. We had a hypothesis that people would come into the restaurant and prefer to eat on one side or the other. They don't care. They just want access to the menu. We've also invented mashup items of the two only available at the dual brand. So for example, if you've been lying awake at night wondering when someone is going to come up with a Buffalo Chicken omelet, we have that now, right? So it's the IHOP Boneless Buffalo Chicken wings in an Applebee's Omelet, it's actually the #1 selling omelet in the dual brand restaurants.

Interesting. So you're saying there are -- there was one in February. And at the end of this year, there will be 30 -- so these are just quick conversions, obviously, that you're able to go from 1 to 30 in 10 months.

Round 1 is entirely conversions. When we look at the potential landscape, right? So like many companies, we have a tool and a model that can evaluate every market in the country, and we put our inputs in, does it have 50,000 people -- what's the household income? How much traffic goes in and out during the day, that kind of thing. We see an opportunity for 900 of these, 450 of the 900 are in what we would call white space. So there's no Applebee's, there's no IHOP. There's no local franchisee. And so it's just have at it. And then there's another 450 that are targets for our existing restaurants. So an existing IHOP or Applebee's franchisee could add the second brand because there isn't a competitor around and the market would support it.

So you really have an incremental 450 boxes you can get from this, but another 450 boxes is just converting or adding the other one.

The new builds would be the 450 boxes and then adding the brand on to the other 450 would be driving average unit AUV and royalty revenue.

So there'll be 30 at the end of this month. And next year, you'll add an incremental 50, so we'll be up to 80?

Yes.

It seems like that is a at least growth vehicle for a company that has struggled at times to put up new unit growth when you're so mature?

Yes. The -- what investors are telling us they're looking for is unit growth and comp sales. And so this is a vehicle to drive unit growth that we haven't had before, and it certainly is driving unit growth at a much quicker pace than we've had the last couple of years.

So just that jumps to my unit growth question, which, again, historically has been a challenge for a lot in casual dining because it's a fairly mature segment. But your ability over the next few years or your confidence to see net unit growth either at each individual brand or as a portfolio. I know it's been a number of years where on a net basis, it ends up being modest closures. How should we think about the next few years from a net unit growth perspective?

So we haven't put an exact date on when we expect to return to net unit growth, but we are at short term, not medium or long term. You got to think about the components that we have. So we have -- you can build a single unit IHOP, which our IHOP franchisees have been doing, opening 30 to 40 new restaurants a year for years. You could build a new Applebee's. We have a new prototype that costs about $1 million less to build than the current one, which we're going to build ourselves next year to prove out the economics. And we've got the dual brand as an option. And by the way, 80% of new IHOPs are conversions. So it's a great conversion brand. So we like to think that we have an option for almost every market. And particularly with the dual brands, we can see driving towards short term -- in the short-term net unit growth. The challenge for brands like ours, as you mentioned, because they're mature, is that when you've got 3,500 restaurants, you have a 1% to 2% close every year, which is normal. So we have to open 100 to net plus 10 or plus 20 because we'll close 8 a year. And again, that's because 30-year contracts have run out, landlords have made different decisions. The market has moved away from where that restaurant is.

Got it. Well, the other question that obviously gets a ton of attention is the comp growth, which Applebee's reverted positive most recently. IHOP is still negative. But seemingly, you guys appear to be encouraged by both brands' trajectories. So I'm just wondering your ability or your confidence to forecast sustaining that positive comp growth at Applebee's and the time frame with which to get back to positive comp growth at IHOP?

Sure. So Applebee's had a tough 2024 as the consumer mindset changed around wanting to know the full cost of the meal. And so as we've leaned into 2 for $25, as I mentioned, that's made a big difference in driving traffic and comps. So the last 2 quarters have been positive after 6 quarters of negatives. We think that is sustainable and notable because the 2 for $25 option on our menu has been on the menu forever but we didn't advertise it. And we didn't advertise it interestingly because over time, each of the franchisees had established their own entry-level price. Some were $25, some were $26, $27, $28. So you can't advertise that nationally unless you have at least 80% of them in the same place. So earlier this year, all the franchisees agreed to $25. And since we've been focusing on that message primarily, you're seeing the change. We've got other things in the work. And to keep it fresh, we have a pipeline of innovation. So each quarter, we'll introduce a new entree at the $25 level and a new app so that not only are we communicating the value message, but we're communicating innovation and something new and fresh to come in for. IHOP, same story, the everyday value that I mentioned is Phase 1 of a 2-phase effort. So Phase 1 was putting together a program that will drive traffic into the restaurants, which the everyday value is clearly doing. IHOP's traffic has grown every month this year versus its comp set. And in the last quarter, had absolute traffic growth for the first time in a decade, which is tremendous. We said publicly several years, but it's a decade. So that's tremendous. Phase 2 is converting that traffic to higher ticket items once in the restaurants. So as we were driving the traffic in the first couple of months, we had all of our tabletop displays and promotional items highlighting the $6 and $7. Now, which is sort of classic retail strategy, right, the $6 and $7 is in the back of the menu and all of our in-restaurant collateral around the high-margin, high-ticket items, which is now driving guests to the higher items. And we don't want guests that didn't know about it to find it. We want them to come in and order the higher-priced items. And we're beginning to see the needle move on that.