Applebee's Q2
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Applebee's Q2
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(FOOL CONFERENCE CALL
SYNOPSIS)* By Debora Tidwell (MF Debit)
Applebee's International Inc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: APPB)") else Response.Write("(NASDAQ: APPB)") end if %> UNION CITY, Ca., August 6, 1996/FOOLWIRE/ --- Applebee's International reported Q2 1996 results this morning. Sales for the system were up 25% for the quarter, which included Rio Bravo Cantinas. They reached another all-time high quarterly sales level of $385.8 million in sales. Operating revenues were $104.6 million, up 25% over Q2 1995. Net earnings were $9.6 million or $0.31 per share which represents a net earnings increase of 41% over 1995. This beat analyst consensus estimates of $0.30 per share by a penny. For the first half of 1996, net earnings were $17.9 million or $0.58 per share, a 40% increase excluding the merger cost in 1995. Applebee's is expanding their international program, continuing to move Rio Bravo Cantina restaurants forward in a cautious but expanding growth program, and refocusing their margin improvement program. And, they continue to add franchise services to keep the pipeline of Applebee's restaurants growing, to continue to improve Applebee's restaurant openings, and to continue a $10 million capital improvement program to upgrade their few older restaurants. SALES Comp sales continue to rebound with company restaurants up 3.4%, franchisees down 1.3%, and the total system flat or slightly down at 0.4%. Openings continue to exceed current annualized volume by substantial amounts. Their record opening volume continues to improve with new store openings averaging over $48,000 per week for the first 6 months of 1996. An aside on franchise income and the sensitivity of franchise income to economic changes -- during the quarter their comp sales on the franchise part of their system were down 1.3%. They think it is important to understand the flow-through of comp sales on their earnings as opposed to the flow through of new openings from their expansion program which gives them opening fees and incremental royalties of 4%. Comp sales, because they only get 4% royalty on incremental sales, are not the driving force of their income. Their earnings engine on the franchising side comes from expansion, new openings coming into the system to garner the full incremental royalty, and the opening fees from new openings. Sales trends are strong. Comps are 4.1% and average weekly sales are growing to nearly $75,000 per week. Company restaurant sales were up 25% during the quarter to just over $91 million. The $91 million in company sales was broken down for the quarter as follows: Applebee's = $71.766 million, Rio Bravo Cantinas = $15.592 million (up 31%), and specialty restaurants = $3.758 million. Overall operating revenues, franchise income, and company sales were up 25% for the quarter. This reflects a strong comp sales performance of 3.4% positive during Q2 driven by a very successful ad campaign supporting the pasta campaign and also the beginning periods of their Summer Fare campaign through the month of June. Franchise income was also up 26% to $13.4 million during the quarter driven by 34 openings in the quarter, a relatively flat number with the prior year which was 36. RESTAURANT OPENINGS AND EXPANSION The company has opened 91 new restaurants so far in 1996, through yesterday, which included 14 company-owned and 77 franchised restaurants. Turning back to last year, they had 666 Applebee's restaurants open at year-end. They currently have 752 restaurants open, 140 company and 612 franchisees. 48 restaurants are under construction and 84 additional franchise sites have been approved for construction. They have 22 other restaurants open -- 18 Rio Bravo Cantinas and 4 specialty restaurants. They also have 9 Rio Bravos under construction and 10 additional franchise sites approved. 1996 is shaping up to be another great year in restaurant openings with franchisees continuing to add to the pipeline each week. On the Applebee's franchise side, they have increased their estimate from 100 units for the year on franchising to at least 125 units. 33 opened in Q1, 34 in Q2. They expect approximately 33-34 in Q3 and fewer in Q4 (20-23). For Rio Bravo, they have appointed 6 new franchisees -- all successful Applebee's franchisees, which brings their total to 15. The development agreements encompass about 20 states and require the opening of approximately 100 restaurants over the next several years. From this point on, they would expect to appoint Rio Bravo franchisees one or two at a time as they enter new markets rather than in waves of 6 to 10 as in the past. They are on track to open 15 Cantinas this year, 5 company and 10 franchises. Their first restaurants in Minnesota and Michigan will open in Q3 with 2 more to open in Q4. They expect to open at least 25 Cantinas in 1997 for a total at that time of approximately 50 and 40 new Cantinas in 1998 for a total approaching 100.
They had their first franchise opening in Augusta Georgia and their first company-owned restaurant opening outside the Southeast in Kansas City. Both of those openings greatly exceeded expectations. They just announced agreements by Applebee's International and 3 of their franchisees to lease 7 Cantina Del Rio sites in 4 states -- one restaurant in Michigan and one site in Michigan, one restaurant in Indiana, 4 in Ohio, and 1 in Illinois. They expect that the range of implementation there is going to be from 60 to 150 days. Consistent with their strategy, they expect this approach of converting or re-hab to become more viable as competitors leave the market. They are pleased with their first European restaurant in the Netherlands and will open their second European franchise restaurants in Dresden Germany in two weeks. They continue in negotiations with potential franchisees for Greece, the United Arab Emirates, and Canada. They also continue to have faith in their forecast of 1200 to 1500 restaurants in the United States as they approach the opening of their 800th restaurant this year. They believe they can achieve this number with a limited amount of cannibalization of existing restaurants and without overbuilding their current markets. SOUTHERN CALIFORNIA They recently transferred their California restaurants in the Inland Empire to one of their outstanding franchisees. Q2 results for California continue to improve very slightly, as anticipated. Average weekly sales are up, but they are influenced by continued strong performance of their newest restaurant which has been operating in excess of $52,000 per month for six months. Margins are improved over the 1995 quarter, but are still a negative 2% and that results in a 1%+ drag on company margins. They changed direction in California for two reasons. A fairly recent consumer research piece that had put them in closer touch with their guests has confirmed that, in their most penetrated markets, their guests are more loyal and therefore more profitable, they visit more frequently, and Applebee's has higher volume in these markets and they produce marketing efficiencies which drive margin. These are markets like Kansas City, Michigan, Minnesota, Atlanta, and Nevada. So, to a strong degree, this change is simply opportunity cost relative to capital and human resources. At the same time, they believe that to be successful in any market, you must be an aggressive developer. One of their first franchisees, who now operates 33 restaurants in 3 states and who has built an infrastructure and acquired Orange and Long Beach counties from them this past April. He wanted to expand and offered to buy and develop the Inland Empire (the Imperial Valley in Southern California). So, the company feels it has the best of both worlds -- the ability to focus their resources on more developed markets where they get a larger, quicker return and more profit contribution. And Southern California gets developed more quickly than what they have been prepared to do. As noted in their press release, they will keep, at least for the time being, two restaurants that are in a negative cash-flow position while they explore their options which include selling to another franchisee or closing. This also prompted them to think about their strategy relative to San Diego and, in that regard, they could concentrate resources on this market and continue to develop. They could partner with a franchisee. Or they could sell those restaurants and the development rights. They are studying those options. The restaurants in Northern California are doing extremely well. In fact, the averages in Northern California are higher than the averages for the entire United States. Their problems in California were principally in Los Angeles. And, to penetrate a market like Los Angeles where you are looking at in excess of 100 restaurants and in excess of 50 restaurants to do any significant marketing, it takes you a long time to get to the point where you can bring customers into a unit via a marketing vehicle. They knew Southern California was going to be tough going in. They purposely wanted to seed that marketplace to show franchisees that they could do well in the California marketplace and they think that strategy proved to be on target for them. Now that they have seeded the market, Applebee's is developing a name in the Southern California marketplace, they are now in the position to move a franchisee in that can develop faster than they can. REMODEL AND UPGRADING PROGRAM The restaurant remodel and upgrading program continues to achieve consumer acceptance, resulting in increased sales for the company and its franchisees. The capital improvement program for restaurants is certainly paying dividends in the early stages. They have increased levels of capital expenditures to support the major remodels and refurbishing of older restaurants and to keep the restaurant image fresh and inviting. They will be rolling out a new remodelled look toward the end of the year that maintains the image and feel of the Applebee's concept, yet presents a fresh new look for their older Applebee's units. Over 485 of their 752 restaurants are less than 3 years old. They also have numerous projects underway to ensure the continued success of the Applebee's concept. These include continued improvement and enhancement of their marketing and advertising programs, a commitment to continue to upgrade their image and physical facilities as and when needed, to keep their menu and products on the cutting edge while delivering the best price/value in the casual dining restaurant industry, and they will be presenting a new look for their menu and products later this year. As far as their World Class Service Initiative, Applebee's started talking about service as a competitive advantage in the second half of 1994. In early 1995, they performed a service assessment that literally examined and graded the level of service in their company and franchise restaurants. Those results gave them a starting point. The results told them what their guests valued and force-ranked certain attributes that were valued. From that study, Applebee's developed standards and tools that focused, among other things, on hiring the right people -- people who possess composure, approachability, humor, and action orientation, to name a few qualities. This leads them to a focus on leadership in their restaurants and employee satisfaction, and therefore, an end result of more satisfied and loyal guests who are more profitable guests. The other major deliverable is an electronic real-time customer satisfaction index ranked by attribute and printed by period and by restaurant which tells them of their guests' intent to return. There are 8 components to this program and they are now being rolled out to more than 95% of their franchisees. There is enormous support and enthusiasm throughout the franchise system and the outcome, if they do it well, should add more weight to the value equation in favor of Applebee's. MARKETING Their game plan of food-specific marketing campaigns continues to confirm that they are a marketing-driven concept. Their two advertising campaigns introduced earlier this year continue to evolve. Their specific food campaign and their image enhancement program to strengthen their brand image have now been combined in single commercials to give them a strong showcase of their new food products along with image branding. They promoted this new advertising by spending an additional $900,000 in company market advertising in Q2, which contributed to the $1.6 million in comp sales increases, stronger new restaurant openings, and average company sales volumes of $41,591 versus $40,236 per week in 1995. They expect this positive impact will allow them to achieve their flat to slightly positive or slightly negative sales forecast for 1996. They have been able, with this spending increase, to overcome the adverse weather conditions in Q1 and expect a continuing positive sales impact. Other than their normal food-specific programs, they will have one gift certificate campaign and anticipate doing one short marketing campaign prior to year end designed to revisit past food items that were successful items that are no longer on their menus. They have eliminated most of the hiatus weeks they previously had throughout past years. They also will continue to support some franchisee markets that are underdeveloped and need assistance as part of their ongoing strategy. BALANCE SHEET HIGHLIGHTS
They have just under $50 million in cash at the end of the quarter. Their total stockholders' equity went over $225 million to just over $226 million. Their debt-to-capital ratio is still 10.5% of total capitalization. Nothing other than that was significant other than the continued increase in their investment in property and equipment as they continue to increase expansion.
P&L HIGHLIGHTS
Food and beverage costs were 28% for the quarter compared to 28.7% last year. In Q2 last year, they had increased produce costs due to flooding that added 40-50 basis points.
Worker's comp showed an improvement of 40 basis points over prior year at 31.1%.
Direct and occupancy cost 25.1% of revenues for the quarter, up from 24.3% last year. The driving impact of that increase is the advertising campaign in Q2 and increased advertising weight in Q2 of just under $1 million over prior year.
Pre-opening expenses are a higher percentage of revenue this year at 1% versus 0.6% last year, reflecting more openings on the company side this year and some non-recurring issues including the rebuilding of their first Applebee's in Atlanta on Memorial Drive and the first Rio Bravo opening in Kansas City which had some additional pre-opening expenses associated with it due to the training in the new market. Going forward, they expect pre-opening expense to run roughly $65,000 per unit.
Overall margin, excluding pre-opening comes in at 15.8%.
G&A expense was 10.6% reflecting their continued leverage with an increasing revenue base. Their expectation was for G&A to come in at the high 10% range and for the year they are coming in at 10.8% after six months.
The only other item commented on is a loss on disposition of property. It is part of their $10 million capital improvement program for relocation, major remodels, and continued refurbishing and the placement of equipment. They had some write-offs related to the Memorial Drive relocation as well as a couple of other major remodels that totalled $424,000 for the quarter. And, they would expect for the full year to be tracking at about the rate they did for the first six months -- roughly $500,000.
Operating earnings came in at a record $14.8 million, 14.2% of total revenue, an increase of 60 basis points over prior year. Earnings before tax is 14.6% versus 13.1% last year, also reflecting continued strong investment income coming from roughly $50 million in cash and cash eqivalents at the end of the quarter. They adjusted the tax rate in Q2 from 38% to 37.5% because of the continued shift in their state income tax structure and a state restructuring project that they undertook at the beginning of the year to optimize state tax rate.
Capital expenditures estimate continues to be in the $75-80 million range for the full year. After 6 monthis it is $29 million and the latter part of the year it will be heavier reflecting a higher number of openings.
THE REVENUE & SALES ENVIRONMENT AND OTHER ECONOMIC ISSUES
As for the sales outlook, their expectation going into the year and into this quarter was that after the first two months of the year, when the weather issues were behind them and they got past the tough comparisons of January and February last year, they would encounter a flat-ish environment in the franchising arena. They were comfortable with that estimate going into the quarter and has proved to be true. Their expectation holds on that for the year. They expect franchising to be flat -- up or down 1% for the year.
On the company side, they indicated going into the quarter that because of the increased advertising behind primarily the pasta promotion, they would expect to see performance at a higher level in Q2 than the franchising. They expect the momentum and increased customer count to help them throughout the rest of the year, but they are most comfortable with also looking for a flat environment from company stores for the remainder of this year.
One question has been related to the impact of the Olympics on the industry. There were two very opposite schools of thought on how it would play out. In the Atlanta area and surrounding restaurants where they operate 8 company-owned stores and have roughly 25 in the Atlanta market. They were pleased with the result during the Olympics for company-owned stores in Atlanta. They saw very favorable sales increases as a result of the increased customer count in the city. Outside of the Atlanta area, it is a little too early to assess it yet. But, based on preliminary information, they saw an impact on the downside but nothing significant and certainly nothing compared to the impact that the weather had on sales in the first two months of the year.
As far as commodities pricing -- other than ground beef on the beef side, they are fully protected on their pricing contracts through early to mid-1997. So, they really don't have a risk on most of their beef usage this year given the fluctuating viewpoints and pricing those contracts will be up for renewal next year. They have a very favorable contract for chicken protecting them through the remainder of this year and they are purchasing chicken at roughly 7-10% below current market right now. The only real commodity issue on the horizon is the cheese pricing. That is a little bit on the uptick right now and has impacted them. But, they believe that the favorable performance they have on beef and chicken and the additional operation efficiencies they continue to gain through purchasing leverage in their early pay programs are more than offsetting it.
The recently completed minimum wage legislation that passed over the weekend takes minimum wage from $4.25 to $4.75 in October of this year and goes to $5.15 next year. Tipped employees are frozen at the pre-increase rate. They see minimal impact as a result of this legislation in the Applebee's system. Most of their employees other than tipped employees are paid above minimum wage, including above the $4.75 rate, so they don't expect a sizeable impact nor the need for a sizeable revenue increase to offset that. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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