IHOP Reports Q3 2006 Financial Results

Date: OCT 25th, 2006

Topic: Franchise News

IHOP (NYSE:IHP) announced today its financial results for the third quarter and nine months ended September 30, 2006. The company raised its fiscal 2006 earnings guidance to $2.35 to $2.40 per diluted share, including stock-based compensation expense of $2.5 to $3.5 million. Financial highlights for Q3 and the first nine months of 2006 included:
  1. EPS for the third quarter 2006 of $0.62, including stock-based compensation expense, was flat versus the same quarter last year. EPS for the third quarter 2006, excluding stock-based compensation expense of $1.0 million, was $0.66, a 6.5% increase compared to prior year.
  2. Through the first nine months of fiscal 2006, EPS of $1.86, including stock-based compensation expense, increased 8.8% versus the same period last year. EPS for the first nine months of fiscal 2006 increased 14.0% to $1.96, excluding stock-based compensation expense of $2.9 million.
  3. Cash Flow from Operating Activities for the first nine months of fiscal 2006 increased 18.6% to $53.9 million. Additionally, $13.1 million of cash was provided by the collection of the Company''''s long-term receivables for the first nine months of fiscal 2006.
  4. Share repurchases for the third quarter 2006 amounted to approximately 279,000 shares of IHOP stock, totaling $13.1 million. Share repurchases for the first nine months of fiscal 2006 amounted to approximately 889,000 shares of IHOP stock, totaling $42.7 million.
  5. Same-store sales growth of 1.3% for the third quarter 2006 was entirely driven by increases in guest traffic, which offset a slight decrease in guest check average.
  6. System-wide restaurants grew 4.9% year-over-year to a total of 1,278 IHOPs. Fifteen new restaurants were developed and opened by IHOP franchisees and its area licensee during the quarter.
  7. IHOP's Chairman and Chief Executive Officer, Julia A. Stewart, said, 'We are pleased with our third quarter and year-to-date performance for 2006. We continue to drive organic growth throughout the IHOP system with our 15th consecutive quarter of positive same-store sales results and remain on target to meet our unit growth expectations for the year. While we are able to deliver solid results by focusing on driving top line growth, we also produced operating leverage through expense control and utilized our capital in ways that create value for our shareholders through share repurchase and dividend payments. Our improved earnings outlook for 2006 reflects the attractiveness of our franchise business model and the benefits of this successful financial formula.'

    Q3 and Nine Month 2006 Performance

    Net income at IHOP decreased by 5.4% to $11.3 million, and diluted net income per share of $0.62 for the third quarter 2006, which was essentially flat compared to prior year. Excluding pre-tax stock-based compensation expense of $1.0 million, net income decreased 0.4% to $12.0 million, and diluted net income per share increased 6.5% to $0.66. The increases in diluted net income per share resulted primarily from a 6.6% reduction in diluted average weighted shares outstanding due to ongoing share repurchases by the Company.

    For the nine months ended September 30, 2006, IHOP reported an increase of 0.7% in net income to $34.2 million, and an increase of 8.8% in diluted net income per share to $1.86. Excluding pre-tax stock-based compensation expense of $2.9 million, net income increased 5.6% to $36.0 million, and diluted net income per share increased 14.0% to $1.96. The increases in net income and diluted net income per share resulted primarily from a 10.3% increase in Franchise Operations segment profit due to higher same-store sales performance for the first nine months of fiscal 2006. This effectively leveraged against modest expense growth in this segment. Additionally, a 7.4% reduction in diluted weighted average shares outstanding contributed to IHOP's per share earnings performance for the nine months of fiscal 2006. This was due to ongoing share repurchases by the Company.

    Cash Flow from Operating Activities increased for the nine months ended September 30, 2006, to $53.9 million compared with $45.4 million for the same period in 2005. This increase resulted primarily from steps taken to accelerate the depreciation of certain fixed assets for tax purposes as the result of the Company's recently completed cost segregation study. Principal receipts from notes and equipment contracts receivable, which are an additional source of cash generation for the Company, amounted to $13.1 million for the nine months ended September 30, 2006. Capital expenditures increased to $7.4 million for the first nine months of fiscal 2006 versus $3.5 million for the same period in 2005. The increase in capital expenditures primarily reflects the cost of restaurant development in IHOP's Company market in Cincinnati, Ohio.

    For the third quarter 2006, system-wide same-store sales increased 1.3% due to increased guest traffic, which offset a slightly decreased guest check average. IHOP believes its appealing limited-time offers and franchisees' continued pricing moderation were primarily responsible for its positive traffic results for the quarter. For the nine months ended September 30, 2006, system-wide same-store sales increased 3.1%, primarily as a result of increases in traffic.

    2006 Guidance Update

    IHOP raised its fiscal 2006 earnings performance expectations to range between $2.35 and $2.40 per diluted share, including estimated stock-based compensation expense ranging between $2.5 million and $3.5 million for the year. This compares favorably to its previous earnings expectations of $2.25 to $2.35 per diluted share, including stock-based compensation expense. The Company's improved earnings outlook is primarily attributable to an overall reduction in previously planned G&A expenses for fiscal 2006, which is now expected to range between $63 million and $65 million, including stock-based compensation expense. This compares favorably to its previously stated guidance of $65 million to $67 million, including stock-based compensation expense for fiscal 2006.

    IHOP also raised its fiscal 2006 guidance for Cash Flows from Operating Activities to $60 million to $65 million, largely due to the net benefit associated with the Company's previously announced cost segregation efforts, resulting in the accelerated depreciation of certain fixed assets for tax purposes. This compares favorably to its previous Cash Flows from Operating Activities guidance of $55 million to $60 million for fiscal 2006. IHOP reiterated its principal receipts from notes and equipment contract receivable guidance, which is expected to be within the range of $18 million to $20 million.

    IHOP reduced its Capital expenditures expectations for fiscal 2006 to range between $9 million and $11 million, which compares to its previously stated range of $12 million to $14 million. This reduction reflects lower estimates associated with the build out of IHOP's Company market in Cincinnati, Ohio.