Industry headwinds are at an all-time high, but so is brand president John Cywinski’s confidence in Applebee’s and its franchisees.
The concept’s same-store sales grew 1.8 percent in the second quarter, lapping a record-breaking 10.5 percent increase in 2021. Average weekly sales per restaurant were $54,500—$2.8 million in annualized AUV—up from $53,400 in the year-ago period. Year-to-date, 30 of Applebee’s 31 franchisees are in positive territory, with zero bad debt for the second consecutive year.
After years of trimming the domestic footprint, Applebee’s expects net unit growth in 2023. The chain completed Q2 with 1,574 U.S. restaurants and 99 international locations. Roughly five of those units have a retrofitted drive-thru pickup window; at least five more are projected to open before the year ends.
For the rest of the year, Applebee’s will roll over double-digit comps every month except December, but Cywinski is counting on the chain’s legacy value proposition to maintain traffic in inflationary times. He pointed to the $1 dozen shrimp offer with purchase of a steak, another film tie-in similar to what the chain did with Top Gun, new product innovation, or a service-oriented initiative around off-premises.
“Brands and franchisees with scale and strong culture, who have earned the trust of their guests throughout COVID, and have demonstrated the ability to be both innovative and nimble, will win big over the long haul,” Cywinski said during Dine Brands’ Q2 earnings call. “I genuinely believe this remains an increasingly leverageable point of difference for the Applebee’s brand moving forward. In summary, the state of the Applebee’s business remains healthy. Our fundamentals remain strong, and we continue to be extraordinarily well-positioned in this environment.”
Additionally, Applebee’s is getting out of the restaurant operating business once again.
On July 26, the casual-dining giant entered an agreement to refranchise its 69 company-operated restaurants based in North Carolina and South Carolina. Neither financial terms nor the franchisee buyer were disclosed in SEC filings. Applebee’s bought the stores in late 2018 from Raleigh, North Carolina-based franchisee Apple Gold Group. At the time, Cywinski said the chain planned to own the restaurants until it found opportunities “under favorable circumstances.”
“The 69 restaurants really roughly represent 2 percent of our portfolio,” said Dine Brands CFO Vance Chang. “So, we don’t really anticipate a material change to our business model at this time.”
Off-premises mixed 25.6 percent, split evenly between delivery and carside pickup. Applebee’s recently decided to bring virtual brand Cosmic Wings from its delivery-only presence to in-store menus starting in August. The Cheetos-inspired concept will now be available to 100 percent of customers, as opposed to 13 percent on third-party delivery marketplaces. Cywinski indicated more virtual brands may be on the horizon for Applebee’s.
Sister chain IHOP saw same-store sales lift 3.6 percent year-over-year—the fifth straight quarter of positive sales. Average weekly sales per unit were $37,900—$1.97 annualized AUV—good for 4 percent growth year-over-year. More than 90 percent of IHOP’s fleet is back to standard operating hours, with 90 percent of pre-pandemic staffing.
Off-premises accounted for 21.3 percent of sales, including 12.9 percent delivery and 8.4 percent takeout. That includes IHOP’s new loyalty program, International Bank of Pancakes, which has more than 2 million members after launching in April. The chain’s two virtual brands, Thrilled Cheese and Super Mega Dilla, are in more than 1,000 restaurants and providing incremental sales and profits.
IHOP, which franchises 100 percent of its 1,665 domestic and 99 international locations, expects to open a net of 50-65 restaurants in 2022 and grow its nontraditional footprint by 80 percent, despite supply chain challenges.
Both IHOP and Applebee’s performed well through April and May, but similar to most of the industry, the chains experienced a slight-to-modest traffic decline in June. Dine Brands CEO John Peyton chose not to provide July numbers, but he did say the company is reconfirming 2022 guidance, based on current trends like decreases in gas prices and the idea that inflation peaked in June.
Dine Brands’ witnessed 22 percent commodity inflation in Q2. That’s expected to ease to the low teens for Applebee’s and the mid-teens for IHOP in the back half of 2022.
To mitigate inflationary pressures, Applebee’s menu prices were 7 percent higher in Q2 compared to 2021, while IHOP’s were about 10 percent. Peyton said both chains saw a slight drop in traffic from household incomes below $50,000, flat to up a couple of points from household incomes between $50,000 and $75,000, and a bump of six to eight points from household incomes above $75,000.
“Which suggests to us that guests that often dine at more expensive restaurants are finding Applebee’s and IHOP because of their well-known value position, which is why we perform well during tough times like this,” Peyton said. “And we actually performed well during the ’08, ’09 recession as well relative to our peers. When it comes to check management, average check has remained steady throughout the two quarters. And so, we’re not seeing evidence yet of major check management once they’re at the restaurant.”
Each chain is also restarting profit optimization work with PricewaterhouseCoopers. Applebee’s began this process in 2017 and delivered 200 basis points of restaurant-level cost reduction in 2018 and 2019. The initiative was suspended because of the pandemic, but Cywinski expects meaningful financial benefit to return in 2023. For IHOP, the partnership with PricewaterhouseCoopers led to nearly 100 basis points of cost reductions across 2018 and 2019.
Dine Brands’ total revenues for the second quarter were $237.8 million compared to $233.6 million in 2021, attributed to positive comps at both brands. Consolidated adjusted EBITDA for was $66.1 million versus $71.7 million last year. The decrease was because of G&A investment and inflation.