Dine Brands Global, Inc. (DIN) Q4 2020 Earnings Report, Transcript and Summary

Hello and welcome to the Fourth Quarter 2020 Dine Brands Global Earnings Conference Call. My name is Grace, and I will be your operator for today's call. [Operator instructions] Please note that this conference call is being recorded. I will now turn the call over to Ken Diptee, Executive Director of Investor Relations. Sir, you may begin.

Good morning, and welcome to Dine Brands' fourth quarter and fiscal 2020 conference call. I'm joined by John Peyton, CEO; Allison Hall, Interim CFO and Controller Tom Song, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's. Before I turn the call over to John, please remember our safe harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results is different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-K filing. The forward-looking statements are as of today and assume no obligation to update or supplement these statements. You may also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brands' Investor Relations website. With that, I'll turn the call over to John.

Thanks Ken. Good morning, everyone. And thanks for joining us. I'll start by saying it's an honor for me to join Dine Brands. I believe in Dine Brands because I believe in restaurants, restaurants are essential to strong communities and human connection. And people appreciate that now more than ever before. I believe we're on the cusp of a restaurant renaissance. And as we enter what we expect to be the beginning of the end of the pandemic, all restaurants face a common challenge. And that's the eating out in America has changed. Those who win the new era of restaurants are those who remained resilient and those who invested in new menu and service innovations and new technology during 2020. And that's the story of Dine Brands with solid fundamentals, two category main iconic brands, and certainly the most talented team members and franchisees in the industry. Let me pause and tell you a bit about my story. As a teen I worked at my parent's restaurant, it was called the Southern Omelet Station in West Philadelphia. And I was certainly humbled and stunned by the almost 24x7 demands required of my parents. After college I went on to work as a consultant for PwC. I then was at Starwood Hotels, and most recently at Realogy. I joined Dine because I believe in the power and the lure of strong brands. 20 years ago, a mentor of mine who was a marketing wizard taught me that brands win when they're different, better and special, and our brands are truly different, better and special. I have for example is a pancake obsessed breakfast innovator that makes the most important meal of the day, also the most fun. And Applebee's embodies what it means to be all American and locally relevant. We call that eating good in the neighborhood. In other words, Applebee's and IHOP are iconic brands that connect an emotional way with our guests. And that's important because we know restaurants are essential to the fabric of community, and human connections. I also like our business model, where 98% franchise and asset light; we are a significant generator of cash. Our franchise model helps buffer us from fluctuations in the market. And our model generally requires less significant investments of capital. And it allows those who are best operating restaurants are franchisee owners to do so with our support. My 20 plus years of Starwood and Realogy taught me that successful franchising requires true partnership, and that we work hard every day to ensure that our independent franchisee builds valuable businesses to create generational wealth. So over the last few months, I've been on the move, I've conducted a deep dive across the company, learning more and more about our brands and Dine's dynamic corporate culture. So far, I've spoken with 40 franchisees in the US and around the world. And they represent 50% of the Applebee's system and more than a third of IHOP restaurants. I've also connected with our suppliers and our bankers and our team members. I've visited our restaurants and our test kitchen. And I can report that our network is aligned in its desire to grow and to invest and to win. Now despite the impact of the pandemic Dine fundamentals remain solid. You may recall that in March of 2020, S&P placed the company's whole business securitization notes on credit watch negative as it did with two other whole business securitizations in our industry at that time. Six months later, S&P removed our note from credit watch and reaffirmed our BBB rating. Dine was the only issuer of the three to not have its note downgraded, or remain on credit watch due to the pandemic. S&P decision last fall was a great achievement for Dine and illustrates that our fundamentals remain strong. And because we emerged in 2020 on sound financial footing, we plan to repay in full the $220 million drawn from our revolver last month - last March. We expect to complete the repayment this month, resulting in interest expense savings of approximately $5 million. In addition to strong fundamentals, we have passionate franchisees that remain in very good standing. Our collection rate for royalty and marketing fee stands at approximately 99%. And the fees we deferred during Q2 of last year are being paid back according to schedule. And in addition to our fabulous franchisees importantly, both brands are led by veteran executive team with exceptional experience and industry knowledge. You'll hear from Jay and John shortly. And it's their expertise and collective wisdom that truly paid off via their extraordinary stewardship of the brands and our franchisees throughout the challenge in 2020. So looking ahead, we're anticipating a rebound in the second half of the year, driven primarily by increases in vaccination rates. Overall weekly sales trends for both brands have also improved since the week ending January 3, 2021. Applebee's improving by approximately eight percentage points, and IHOP posted gains of about six points. We're also encouraged by our off-premise business, both brands maintained off premise sales of approximately one third of total sales during the fourth quarter. And we view off-premise dining as a new consumer behavior that will live beyond the pandemic. We're continuing to invest in technology to support our growing off-premise business. And we're certainly optimistic about the outlook for Applebee's and IHOP because during times of crisis guests just like me, and just like you look to brand we trust. And as restaurant guests returned to indoor dining guests will trust that our franchisees and restaurant team and IHOP and Applebee's are committed to their health and safety. So taking collectively, the fundamentals uniquely positioned Dine Brands to enjoy the challenges brought on by the pandemic, and position us for long-term sustainable growth. Our team focused on three objectives over the next 12 to 24 months. The first is to navigate what we believe is the beginning of the end of the crisis. The second is to win the recovery and win the new normal that follows and the third is to evaluate long-term growth vehicles. So allow me to share a bit of my thinking about each of those. First is to navigate the beginning of the end of the crisis. Of course, we'll continue to monitor and protect cash. And we'll also focus on continuous improvement in operational health and safety standards in our restaurants. We're preparing compelling marketing campaigns and new products to drive as recovery grows. And we are working intensely to ensure the financial health of our franchisees. Second, we will win the recovery and win the new normal by leveraging our recent investments in visiting consumer insights, CRM and digital to reactivate our guests via one-to-one and highly targeted marketing. And we'll realign our menu to reflect learnings from the past 12 months. And we'll reset the channel mix to reflect those learnings as well. And third, we'll continue to evaluate long-term growth vehicles, both traditional and non-traditional development, which includes everything from new prototypes for both brands, virtual brands and ghost kitchens, both of which we have efforts underway. And we'll take a look at international expansion opportunities and key markets and possibly exploring incorporating a third brand at the right time. As I wrap up, I want to emphasize the Dine views the crisis as both a threat and an opportunity. And while we knew it was important to play defense to protect our liquidity and our flexibility, we also said often so that we would emerge from the crisis in a position to serve more guests both inside and outside of our restaurants. Because we play often in 2020, we continue to invest in new digital and CRM products that are coming online early this summer, as well as innovative menu items like IHOP happy hour, and burritos and bowls in IHOP and Applebee's new virtual brand cosmic wings. And while we were investing in new technology and menu offerings, our franchisees invested in supporting their local communities by feeding and sheltering frontline workers in those in need. And so it's all of these investments combined, that will pay off as our guests returns indoor dining. So with that, I'll turn it over to Allison to provide an overview of our financial results.

Thank you, John. Good morning, everyone. I'll begin with a business update. Then review our results for the fourth quarter, and the full year. Lastly, I'll discuss our financial performance guidance for 2021. During a very challenging year, we took steps to maintain our financial flexibility, including drawing down $220 million in March 2020 from our revolving credit facility, all which remain outstanding as of December 31st. As John just mentioned, we plan to repay the $220 million during the month of March. Due to this proactive measure we continue to have very strong liquidity. We ended 2020 with total cash and cash equivalents of $456 million, which includes restricted cash of $72.7 million, excluding the $220 million drawn from our revolver, cash on the balance sheet was $64 million higher at the end of 2020, compared to a year-end 2019. The increase was primarily due to the temporary suspension of both our quarterly cash dividends and our share repurchase program. These steps were taken a response to COVID-19 pandemic and the need to maintain financial flexibility. Additionally, we maintain tight G&A management during the year of austerity, and were able to lower compensation costs following the difficult decision to furlough approximately one third of our corporate staff for several months during 2012. Turning to our financial results, I'll begin with the notable changes on our income statement. For the fourth quarter adjusted EPS was $0.39, compared to $1 78 for the same quarter of 2019. For 2020, adjusted EPS was $1.79 compared to $6.95 in 2019. The year-over-year decreases due to a significant decline in customer traffic, resulting from governmental capacity restrictions on dining and operation. This led to declines in domestic comp sales at both brands and a decrease in number of Applebee's and IHOP effective restaurants and lower gross profit. The impact of the pandemic on franchise operations resulted in an increase in bad debt. For 2020, our bad debt was approximately $12.8 million as compared to virtually no bad debt for 2019. Switching gears to G&A; given our asset like business model, G&A remains an important lever for us. In 2020, it constituted 30% of our total revenues excluding advertising. G&A for the fourth quarter of 2020, improved to $39.4 million from $41.7 million for the same quarter last year. The decline was primarily due to lower travel and compensation costs. G&A for the fourth quarter was lower than our guidance of approximately $45 million, primarily due to our ability to tighten G&A controls in response to the resurgence of Coronavirus cases. G&A for 2020 was $144.8 million, including $4.3 million related to the company restaurant segment. This compares to $162.8 million in 2019. The decline was primarily due to G&A entire management around that, which included a decrease in compensation and travel related costs. Now turning to the cash flow statement; cash from operations for 2020 was $96.5 million, compared to $155.2 million in 2019. The change was primarily due to a decrease in total revenues, resulting from a decline in guest traffic on our restaurants as previously discussed. Our highly franchised model continued to generate strong adjusted free cash flow of $106.6 million in 2020 compared to $148.8 million in the prior year. The decline was primarily due to the decrease in cash from operations just discussed, primarily offset by lower CapEx compared to 2019. We believe that our cash on hand, cash from operations and the steps was taken to mitigate the effects of the pandemic will allow us to continue to make strong liquidity throughout the year as our business continues to improve. Now regarding capital allocation, we continue to reevaluate our capital allocation strategy. As industry conditions continue to improve, and normal restaurant operations resumed. As previously discussed, we plan to repay the $220 million drawn last March. Additionally, we'll review the reinstating our quarterly cash dividends and assumption or share repurchase program. We will also evaluate investments in our existing brands enabled platforms for both organic and non-organic growth. Now for an update on our franchisees assistance program, Dine Brands provide approximately $55.7 million in royalty advertising fees and rent payment deferrals to our franchisees and continue to provide assistance on a case-by-case basis. In total, we provided approximately $61 million deferrals to 223 franchisees across both brands of what 61 have repaid their deferred balances in full. Overall total profit $32 million of the original subsequent deferrals have been repaid and repayments are on track. Regarding adjusted EBITDA, our consolidated adjusted EBITDA for 2020 was $158.7 million, compared to $273.5 million for 2019. The decrease was primarily due to a significant decline in customer traffic, resulting from a governmental mandated dine in capacity restrictions discussed earlier. This led to decreases in both revenues and gross profit in 2020 compared to 2019. Because of our asset light model and low CapEx requirements, it continued to have very high quality adjusted EBITDA, of CapEx represented only 7% of 2020 adjusted EBITDA. Lastly, I'll review our financial performance guidance for fiscal 2021, which reflects the projected impact of the pandemic on our guidance as of today, due to ongoing uncertainty created by COVID-19, we currently cannot provide a complete business outlook for the year. As our business conditions continue to improve and dining capacity restrictions are lowered, we will evaluate providing additional performance guidance as necessary. We're not offering guidance around development comp sales because of the uncertainty of the recovery this year. However, I can tell you, G&A is expected to range between approximately $160 million and $170 million including non-cash stock-based compensation expense and depreciation of approximately $45 million. Please note that projection includes approximately $5 million G&A related to the company restaurant statement, and capital expenditures are expected to be approximately $14 million inclusive approximately $5 million related to the company restaurant segment. To wrap up, Dine Brands has significant cash on a balance sheet and has maintained strong financial flexibility, despite the adverse conditions in 2020. Comp sales of both brands have improved significantly since the onset of the pandemic. Although there's a lot of work that's still ahead of us, we believe accomplishments this year; have laid a solid foundation for growth. With that I now turn the call over to John Cywinski.

Thanks Allison and good morning. Good afternoon, everyone. I'm very proud of what this Applebee's team accomplished in 2020 and remain extremely optimistic about our business prospects here in 2021. In partnership with our franchisees, we fundamentally altered our business model to adapt to this new environment. Applebee's comp sales progressed from minus 49.4% in Q2 to minus 13.3% in Q3 to minus 1.9% in the month of October, when we last spoke. Almost immediately thereafter, the country experienced a rather abrupt resurgence of COVID, directly impacting our Q4 trajectory. As a result in November comp sales were minus 15.0%, while December came in at minus 30.1%. Now the good news is that business is now improving its comp sales for January in the first three weeks of February combined, were minus 18.1%, rolling over a very strong 3.3% increase from the same timeframe last year. Additionally, given COVID related restrictions, we scaled back our media spending in December, January and February. It's also important to note that not all casual dining brands are impacted equally by these restrictions given each brands geographic distribution. Applebee's has a disproportionately heavy penetration of its restaurants in the Northeast and Midwest two geographies, obviously hardest hit by dining restrictions. While reflected in these recent results, this will ultimately and disproportionately benefit us, as restrictions are eased over the coming months. For context at the end of December 412 of our dining rooms were closed due to government-imposed mandates. Thankfully, the landscape has changed dramatically over the past month in virtually all of our 1,600 dining rooms are now open for business. In many respects, our current operating environment feels very similar to late summer of last year. If you recall, when we saw Applebee's sales momentum accelerate as restrictions were eased, including our first positive sales week at the end of September. And barring unforeseen circumstances, I anticipate a similar dynamic to unfold very soon here in 2021. Now for the month of February, Applebee's sales mix consisted of 63% dine in, 22% Carside To-Go and 15% delivery. On the off-premise front, we continue to enhance Carside To-Go with the upcoming introduction of a third-party app called Flyby that notifies restaurant teams through Geo fencing, the moment our guest arrives on a lot. Also, our franchise partner in Arkansas recently opened Applebee's first drive thru window, in addition to being very well received by team members and guests. This dedicated drive through lane eliminates weather challenges, improves throughput, and importantly extends our late night To-Go operating hours. From a delivery perspective or tamper evident packaging is now fully deployed throughout the brand is another visible point of guest reassurance. Without question our off-premise investments over the past year have broaden Applebee's reach and relevance across this important convenience driven occasion. Now, with respect to Applebee's on-premise business, I anticipate our 63% sales mix to naturally elevate this year, as indoor dining gradually returns, and I firmly believe dining room service will be an unmistakable core strength for Applebee's as guests look for that long overdue escape from home where they can once again connect with one another over a good meal, and perhaps a drink. Most importantly, these guests will naturally gravitate to brands that have earned their trust and loyalty throughout the pandemic. On this front, we're confident Applebee's is exceptionally well positioned. This optimism is supported by our very strong brand affinity and visit intent metrics, which have proven to be reliable leading indicators of brand performance. And as the year progresses, we'll continue to deploy guest facing digital technology, such as our pay and go initiative designed to provide easy mobile payment options without the need for a server. Now, I'd like to take a moment to discuss our virtual brand evolution. As you may know, we just launched Cosmic Wings nationally on February 17, introducing a fully differentiated virtual brand, targeting a younger audience around the wings meal occasion. At the moment, Cosmic Wings remains an online delivery only concept available via Uber Eats and fulfill through approximately 1,250 Applebee's kitchens. In addition to craveable wings, tenders waffle fries and onion rings. The team has developed a proprietary menu of Cheetos original wings, Cheetos, flaming hot wings, as well as Cheetos cheese bites. This innovation work is exclusive to Applebee's, and the culmination of our ongoing partnership between our culinary and marketing teams, franchisees, PepsiCo and Frito Lay. While it's far too early to draw any conclusions, Cosmic Wings averaged $510 of incremental sales per restaurant last week, in its first full week of operation, showing a steady build from day to day. We're very pleased with these initial results. And we'll certainly be in a better position to quantify the ultimate financial impact of Cosmic Wings on our next call. We've also been active in piloting our first ghost kitchens in partnership with our franchisees, with two in Philadelphia, one in Los Angeles and another soon to open in Miami. To clarify, these are low capital investment, small footprint kitchens, without a street front presence, designed to satisfy online delivery demand for Applebee's where we currently don't have restaurant penetration. The business model here appears attractive in the right geographies where a brick-and-mortar presence may not be feasible. Now, as I reflect upon this past year, I know our guests genuinely trust Applebee's, perhaps now, more than ever, whether it's in their family rooms or in our dining rooms, there's no more relevant brand positioning for this environment than eating good in the neighborhood as John referenced. And thanks to the resilience and fortitude of our franchise partners, the Applebee's ad fund is in great shape, allowing us to reestablish our national media presence as we engage America with compelling messaging. To this point, last week, we launched our latest national event, five boneless wings for a $1 with the purchase of any burger, which is resonating extraordinarily well. In fact, last week, Applebee's achieved our single highest sales volume week, since the pandemic outbreak in mid-March of last year, that's 50 weeks ago. It's also worth noting that we are strategically and tactically aligned with our franchisees around our full year marketing and innovation plan, along with contingencies given the obvious need for agility in this environment. In closing, I believe Applebee's is near an inflection point and that America's pent-up demand for dining out is indeed very real. We saw this trajectory last year, up until the resurgence of the virus. And I'm confident we'll see it again this year very soon. And when this does occur, our franchise partners are very well positioned to not only return to sustained growth, but to thrive in a post pandemic environment is they unlock the full potential of the Applebee's brand. With that, I'll turn it to Jay.

Thank you, John. Good morning, everyone. We are very optimistic about the road ahead for IHOP for several reasons. First, a quarterly comp sales improved meaningfully from a decline of 59 1% for the second quarter to decline of 13.1% for the fourth quarter, reflecting a net increase of 29 percentage points since the pandemic began. Second, the brand is well positioned to benefit from pent-up demand when restrictions on dining capacity are eased, and we have a strategy in place to capture it. Lastly, our development pipeline remains strong and new opportunities are being pursued. As we close out in the fourth quarter, IHOP's comp sales declined 30.1% which is on par with a family dining category. Our performance, especially the final six weeks was adversely impacted by the resurgence in Coronavirus cases. We were particularly impacted in California and Texas, which collectively comprise approximately 25% of our domestic restaurants. Our result for January 2021 improves to minus 26.8% representing a gain of 10 percentage points from December. February's comp sales through weekend in February 21 were down 27.6%. For the same period, our sales mix consisted of 66% dine-in, 16.9% To-Go and 17.1% delivery. As we continue to navigate the ever-changing environment, we have four strategies to help the brand drive growth. Number one, focusing on our PM Day part number two, value, number three maintaining our gains in off-premise sales and number four development growths. To address our first and second strategies of PM Day part and value, we want IHOP happy hour on September 28, which offers our guests a wide array of value options during the afternoon and evening hours or later depending on the location. We believe this new value platform will not only play an important part in strengthening and expanding our PM business, but also drive alternate sales in locations where it's available. IHOP happy hour is driving incremental sales in the mid to high teens and approximately 20% incremental traffic compared to the rest of the day. This equates to a low to mid single digit lift in both sales and traffic for the whole week. IHOP happy hour is consistently four times more effective at driving traffic than any window we've had during that time. Our third strategy is growing our strong off-premise business. As consumer sentiment is shifting and off-premise becoming more accepted around the country, our mix has remained strong. For the fourth quarter off-premise was 33.3% of total sales compared to 32.4% for the third quarter. To provide more color To-Go accounted for approximately 17% of sales mix and delivery accounted for approximately 16%. Off-premise comm sales for the fourth quarter grew by 130% driven primarily by traffic. We believe that we can retain a significant amount of this growth even as dining room capacity restrictions are eased over time. Conducive to this is our high portability of IHOP menu and a proprietary off-premise packaging, which keeps our food warm approximately 40 minutes after leaving the restaurant. Additionally, we implemented Carside To-Go quickly at the onset of the pandemic and continue investment in our IHOP and go platform. IHOP latest menu innovation is our all new signature burritos and bowls, which is introduced this past January. The sixth new burritos and bowls were designed with creative flavor combinations, and easy portability in mind for guests to enjoy wherever they please and appeal to guests across all day parts. The results since the launch are very encouraging, with burritos and bowls capturing approximately 8% of ticket order incidents based on our soft launch without a full media and marketing campaign. Switching gears to our fourth strategy development, as we look at growth heading into 2021 and beyond, we will grow our IHOP brand with four different platforms. First, traditional development of which we have a stable pipeline as a result of franchisee obligations that were deferred as part of our assistance during the pandemic. Second, non-traditional development which is led by our largest agreement in our 62-year history with travel Centers of America for 94 restaurants over five years. Third, the resumption of work on our flipped by IHOP concept, which we expect to open our first locations this year. And fourth and finally, we've developed a new small prototype that we intend to test this year. We expect it to provide new opportunities for franchisee growth with a higher return on investment allowing us To-Go into areas we might not have been in able to penetrate previously. For 2021, we expect to continue to reinvigorate our growth that was hindered by the pandemic. Now for an update on our domestic restaurant open for business. As of December 31st, 1,174, restaurants or 70% of our domestic system was open for in restaurant dining with restrictions. This compares to 1,425 restaurants or 85% as of September 30. The decline in locations open for in restaurant service was primarily due to the spike in coronavirus cases discussed earlier. Turning to the unit guidance for restaurant closures we provided in October. As a reminder, given the impact of the pandemic on individual restaurant level economics, we evaluated only greatly underperforming restaurants that we determined had a greater chance of not being viable coming out of the pandemic. These restaurants were generally some of the lowest performing units in the system based on sales and franchisee profitability. This program concluded with 41 closures over the last six months, which is well below our initial projection of up to 100 restaurants. We remain confident that will eventually replace these severely underperforming locations and grow our footprint with better performing restaurants that have volumes closer to our pre COVID AUV of approximately 1.9 million. To close, we're executing against our four strategies to drive our growth, which includes PM Day part expansion, value, maintaining our gains and offering a sales and development growth. We've done the heavy lifting to position the brand for long-term success and build an insurmountable lead in family dining. I'm pleased with what our franchisees and team members have accomplished during a very challenging year. And I'm very optimistic about the road ahead. With that, I'll now turn the call back over to John Peyton for his closing comments. John?

Thanks Jay. We have a tremendous team. And I want to thank Allison and John and Jay. It's truly because of their leadership, particularly during the pandemic that Dine and its brands are poised to enjoy significant upside potential in 2021 and beyond. Understanding, our meaningful change in performance trajectory will not happen immediately. But I'm confident in our ability to restore sustainable same-restaurant sales momentum in the second half of 2021. As more people are vaccinated and guests who are eager to dine out returned to our restaurant. I have absolute faith that our franchisees and our talented team members will lead us into a new restaurant renaissance. Our strong fundamentals remain intact. We're positioning Dine for long-term growth, and continuing to evolve with a gift centric, data driven organization. And so with that, we're pleased to take your questions. Thank you.

[Operator Instructions] The first question comes from the line of Jake Bartlett from Truist Securities.

Great, thanks for taking the question. My first is really on the regional performance. And I understand there's a lot going on with weather and restrictions being tightened. But can you give us a sense of how stores performed in the markets that have had the least restrictions when thinking of markets like Florida? In terms of how their sales - how the indoor dining has been recovering? And then what's been happening with the off-premise mix in markets like that.

Jake, this is John Cywinski. It's a good question. I won't quantify what we see. But suffice it to say those geographies with very few restrictions perform well, you see a not surprisingly a larger percentage mix than the national average for dine-in. And he may in fact see the inverse of what we saw in our most restricted geographies where two thirds of our business was off-premise and a third on-premise. In those least Restrictive geographies, we see the inverse of that. And we'd like the revenue results that we see. And we're anxious to get the full national brand back to that point. We have significant variability, as across the country, geographically, and in some of those geographies that you reference are benchmark geographies for us, they paint a picture as to what's possible. It's very favorable.

Hey, Jake, this is Jay Johns at IHOP. I would say - to most everything that John said the only other thing that I might add is that you asked about To-Go business and how that holds up as well. And I think there's an absolute direct correlation between openings up and not having restrictions and the performance of those restaurants, it's logical, it's factual. But I do think that To-Go business has held up really well even as restaurants have opened up or maintaining a lot of that To-Go business, most of that To-Go business hasn't moved forward. So clearly one of the keys versus just as these areas open up, we're going to do a better job.

Great. That's really helpful and a question on John on the Applebee's, you made the comment that last week's average weekly sales were the strongest since the COVID crisis began. Is that to imply that same store sales were actually were positive for Applebee's last week?

Jake, it won't. Again, I'll resist quantifying that. But I'll make two points. Number one, the last week data that I referenced is not in the data that was disclosed in our release, which is only through the first three weeks of February. Suffice it to say it was a significant trajectory shift in a very favorable fashion, from what we saw earlier in February. Make sense?

It does. And then my last question here really on the closures at IHOP. I just want to clarify when you mentioned the 100 stores that were possible, that you were looking at. Was that just a comment on the domestic side, I noticed that this fair amount of international closures this quarter, but less than I expected on the domestic side, which is great. But wanted to just to clarify that and then two just to clarify that the closures on the kind of the majority of closures you think are ended, I think you would use the word concluded in terms of kind of assessing those stores. So should we expect elevated closures bleeding into the 2021? Or has this system essentially kind of been cleaned up already? And now we're kind of set for some symmetrical net growth?

Well, I think to begin with your question about what was the 100 referring to, that was referring to potentially domestically up to 100. And what I mean by that program; that was a special program that we had done this research on these restaurants and work with franchisees on those particular locations. And that program has come to a close. Now as a regular course of business there's always going to be other closures et cetera. But as far as exit the program that's over at 41.

Okay. And is that program involving kind of lifting any penalties for closing? And was there any kind of promotion of trying to clean up the system.

Well, obviously, we work with the franchisees too, together on this too, in a way to help their position for the rest of their portfolios in many cases, so we work directly with the franchisees on that and on how we work those out of the system. But like I said that program was a unique thing that we put together. I'm not going to share specific details on what fees were et cetera. But that program is over, we're back to kind of running the business with a normal review of any kind of requests franchisees have at this point.

Your next question comes from the Nick Setyan from Wedbush Securities.

Hey, thank you. Is the marketing now back and then also, on the virtual brands, is there a like a target weekly sales number internally that you guys or at least just directionally, you guys are willing to share especially since there is a peer benchmark out there?

Hey, Nick, this John Cywinski. On the marketing front, we love our position will be as you look at the year, we're a bit like in Q1 quite candidly, as I mentioned, we did pull back on media spending in January and February, which means Q2 Q3 to Q4 are going to look pretty favorable when you assess the full year. Virtual brand, your question on is there a threshold in any new investment and keep in mind this is very capital light. It's a fairly easy investment. Our operators execute well. We do expect a minimum threshold of incremental sales performance. You could call that directionally a percentage point but we believe there's significant upside beyond that, but it's just too early Nick to begin to frame that we only have 10 plus days in market and what I will tell you is we see steady improvement sequentially from one day to the next.

Got it. And then the question on margins, the Applebee's gross margin, I think it's 102.6 for the quarter, is that just a reflection of the recovery of some of the deferrals. And then on then IHOP is 7.3, any kind of an outlook there sort of both for 2021, at least directionally and what's really going on there with the gross margin and IHOP.

So, this is Allison. The gross profit margin on Applebee's you'll see there's an increase in bad debt year-over-year but we're not giving any guidance related to 2020 other than G&A - sorry 2021 other than G&A and CapEx.

We have questions from Brian Vaccaro from Raymond James.

Hi, thank you and good afternoon. I had a couple questions on the quarter to date trends. You mentioned for each brand. And I appreciate the comments on average weekly sales and the improvement you're seeing there. I think he said Applebee's high up 6% and I wasn't sure if that's compared to kind of the reported AWS in the fourth quarter, or were you comparing that to December? So could you just so we're on the same page? Could you disclose kind of average weekly sales for each brand in that quarter-to-date, period?

This is Jay in IHOP. Are you talking about in the fourth quarter, you talking about the what -

No. In the quarter-to-date period. You improved 6% but what does that mean? Is that versus December or is that versus the around 27 you did in the fourth quarter, just trying to get sort of a current average weekly sales check basically, for both brands?

Well, for IHOP we have actually, I think my comment was we had improved 10 percentage points from December into January. So clearly, when things were really shut down the last six weeks of Q4, we were struggling. We have come back nicely in January, February. And if you look at the trends on our sales going all the way back to last year, we were making great progress and trends were going great until the last six weeks of the year where we took a little bit of a dive and then we're coming back slowly out of that. And the correlation that I see is directly related to the closures is as cities are starting to open up now, I'm seeing that that's going to trend the right direction. But I don't want to give any real specific numbers on that in quarter right now.

Hey, Brian. This is John C, the Applebee's front way as I referenced, we were down 30%, 30.1%, I believe, for December, and at about 12 percentage points favorable move down 18% in the first seven weeks of the quarter, very similar January and the early part of February. Keep in mind some pretty meaningful weather impact in a couple of those February weeks, and then we are just now as I referenced beginning to reengage with meaningful national marketing, which we believe has - will have a significant impact.

Hey, Brian. This is John Peyton. Just to make sure I answered the question and we're answering it accurately. So for those first seven weeks of January and February, we're comparing number one to same week prior year. And then each of the weeks in January, February is improving relative to the last. Does that make sense?

Yes, no, that's helpful. I appreciate that. And also, I just wanted to ask you in terms of given how important having dining rooms open is to the overall sales. And I appreciate it. I think it was 80% of Applebee's and 70% at the end of December. But what does that look like today? In terms of the number of units I guess you said 99% at Applebee's, but what does that look like in IHOP today, percent dining rooms that are open.

We've only got about 33 restaurants that are not open for some form of business right now. And we've got about 200 that may still be doing mostly To-Go or patios only right now we've got a heavy presence in California obviously. So there's a lot of our restaurants and still are impacted.

And Brian on the Applebee's front, we've got about 10 dining rooms currently closed, half those in California half in Oregon. Expect them to be open very soon, which is great news.

Yes, that's great. And I appreciate you mentioned and shifting gears a little bit to the development side. Appreciate the update on the IHOP side, I guess assuming no major setbacks in the broader COVID recovery narrative, will you expect to return to net unit growth at IHOP in '21? Or perhaps that could take into '22? And then what's a reasonable expectation on closures at Applebee's this year?

Yes, on the IHOP, this is Jay. On the IHOP, we're just not giving any guidance yet on exactly how this is going to play out. We clearly have franchisees that are interested in developing, but they're still in the middle of COVID right now, they're still in - so that the rate at which that comes back, we're just going to have to wait and see how that plays out.

And, Brian, on your question regarding Applebee's, we certainly haven't forecasted, it's difficult in this environment, other than to say, as John referenced, franchisee collections on royalty and advertising are superior. And we're very optimistic about this 1,600 unit portfolio as you know we did. We've cleaned up much of this kind of the non-viable assets over time over the last three to four years. But we'll resist framing any expectation or number at this point in time?

All right, fair enough. And then just last one for me, I wanted to ask on Cosmic Wings. Could you highlight some of the key differences on Cosmic Wings versus neighborhood wings? Or perhaps comment on your approach to marketing the concept or other differences that are worth mentioning there? And so if I missed it, but is there an expected timeline on when it might be offered from all 1,600 domestic locations?

Brian, I'm glad we piloted Neighborhood Wings last year, as you know, we did so and in several 100 restaurants what we learned was very clear. The brand itself, the virtual brand needs to be differentiated and separated in some respects in terms of positioning from Applebee's. The menu itself needs to be proprietary and perhaps buzz worthy. Our teams need to be able to execute that brand well and the naming was important. We along with the targeting, we had a very specific demographic here a bit more youthful, a bit of a male skew, Cheetos lovers, delivery lovers, wings lovers. And given that demographic profile, the naming and the positioning felt quite naturally to us. But you'll notice we did not incorporate the word or the name Applebee's in that, so Cosmic Wings, we validated that with consumers with that demo in particular, it resonated exceptionally well. And your question on timeframe again, Brian, what was that question?

Yes, just thinking I think you said it COSMIC WINGS is currently offered from about I think it was 1,250 Applebee's units and just wondering when it'll be - if and when it will be available across the system domestically.

I would expect so 1250 is with our partnership with Uber Eats and where they have a strong presence, obviously, we will have a strong presence. Could this brand be expanded in terms of the distribution channels? Yes. And I'll resist how that may unfold, but you can draw your own conclusions, Brian, it's been very well received. And so I would anticipate exploring all options moving forward after the first couple of months.

Your next question comes from the line of Todd Brooks from C.L. King and Associates.

Hey, thanks for taking my question. First, if we could talk maybe weather and storm impact we had that couple of tough weeks and actually still some tough weeks for Texas and a couple of the other states down south but especially looking at the weekly IHOP sales, they've been remarkably consistent across the first seven weeks and it's just a bit of a surprise to me given it looks like almost a quarter of the stores are in that kind of Texas, Georgia, Virginia, North Carolina belt so if we could talk maybe about the IHOP performance and lost store days of both brands due to the winter weather that we've had down south.

Well, I think on the IHOP side, there's interesting drivers on our side of what as we talked about before, capacity is probably the absolute most important thing. Obviously, we get weather like that close restaurants down, we had about 200 restaurants across our system that were closed for multiple days because of weather impact as it spread across the country. So clearly, we have some impact on it. I don't think we've teased out all of the information as far as the total impact, we could say is only related to that. Holidays are a big impact for us as well. So when you look at the first quarter, so far, it's been a lot of different holidays, a lot of different weeks that are a little odd compared to just a regular run rate week. As soon as we started to gets the momentum going one direction than the weather hit. This past week, we were rolling over National Pancake Day from last year, which we cancelled this year and have moved to a spread out through April events. So there are a lot of things that just don't sync up for a while. So you may be seeing some odd numbers just because there's a lot going on in this data that is somewhat inconsistent when you look at it. I think the general trend I would say, though, is if you look at take a step back and look at the big picture, we are trending the right direction, we keep having these little hiccups that happen on given weeks, but I feel that this is about right to make a nice move forward for us as the capacity restrictions are lifted.

And Todd on the Applebee's front, had it not been for weather we would have seen sequential improvement from January to the first three weeks of February. I won't quantify it. It's a little less than 100 basis points of impact.

Okay, great. That's helpful. Thanks. And then can we talk going back national advertising wise, John, I think you said Applebee's back on in the past week or so. And Jay, I don't think you commented if IHOP is back on yet or not. But this has been such a positive driver for the same store sales recovery in fiscal 2020 in the second half of the year. Can we talk about maybe share a voice that's out there now that you're going back into national advertising and then anticipated or hope for lifts as you start to leg into especially those bigger weights, when you get into Q2 through Q4.

Hey, Todd. This is Jay. On the marketing front, we never went completely dark, we were always doing some kind of marketing via digital or one-to-one, we cut back some on the what you would see as the big larger national TV campaigns et cetera. So just like Applebee's, we have spread our budget a little differently this year, just based on capacities et cetera. And we are very confident we have a great plan for the year, both with innovation and marketing and how we're going to come to market with things. So I feel very comfortable, we've got a really good plan, we should have plenty of money. As long as the bottom doesn't fall out of this thing again, which was some kind of COVID resurgence, it's really bad, and I think we're going to have a nice portfolio of things to promote. And we're going to have a lot of money to do that when we get into the second, third, fourth quarters.

And Todd on the Applebee's side, you referenced that we have something this year that we didn't have last year, we know how the brand has performed as restrictions ease, and guests are more willing to dine out. So that trajectory you referenced last year, May through September, we move from minus 50% to our first positive week of sales. And we really had an exceptional team and they understand how to message both rationally and emotionally. And that pacing and sequencing of messaging with our guests, as we evolve out of this pandemic is something where they really do have a finger on the pulse so to speak. And you're seeing the start of that right now. And I anticipate it will unfold and perhaps that trajectory will look similar, if not better than what we saw over a five-month timeframe last year.

Your next question comes from the line of Brett Levy from MKM Partners.

Great, thanks. And good morning to you guys. Good afternoon from us. If you could talk a little bit more on how you're thinking about the capital allocation plans. Obviously, debt paid down is going to be the biggest and the most immediate but when you look at not just to the shareholders, but what else can you do in terms of investment in the infrastructure, and also franchisee support. And then John Peyton, I have a question for you.

So in terms of the capital allocation strategy, obviously, we wanted to pay down the $220 million that we borrow in March, which we're going to do this month. We really can't see at this point, because the industry conditions are very variable at this time. We definitely want to continue to look at our dividend. Our repurchase of shares, investment both organically and none organically. But it's really difficult to I believe anything data at this point, just do the industry conditions.

On the on the M&A front? Obviously, you are not looking for names, but what kind of criteria make your wish list if you were To-Go outside of your own system?

Sure, Brett. It's John, I'll take that. And I'll just tack a little bit onto the last thing that that Allison mentioned, as well. when it comes to capital, there's, obviously there's the thing about dividends and shareholder, shareholder return and buyback, but we're also looking at investments in technology in virtual brands based upon our learnings from Cosmic Wings, possibly exploring the acquisition of a third brand. So we're looking at all of that, as we look toward 2022 and beyond. When it comes to M&A, we're - when we do think about it, we'll be looking at a tuck-in acquisition, certainly substantial enough that it's accretive but with the potential to grow to the size of our current brands or close to it, we're certainly interested in a high growth category that is complimentary to the two segments that we're in, and not competitive with our existing brands.

And then, John, just you talked about all the things that you viewed as positive, as you join in to the Dine story. And now excluding capacity and restrictions, because those are obviously challenges outside of your concerns. Where do you see the greatest opportunities for low hanging fruit? And what do you still see as the largest challenges and impediments to not just recovery but to meaningfully take share from your peers? Thanks.

Sure, thank you. So in the short term, the biggest opportunity is vaccine, vaccine, vaccine. And we are optimistic that that people all of us are anxious to get out see other people, hug other people and reestablish a sense of connection and community and restaurants is the place to do that. Over the long term, we are focused on and we've been investing throughout 2020 in the digital technology that necessary to facilitate off-premise dining. We think that the growth in off-premise is incremental for us. We don't think - we think it's going to settle somewhere above where we were pre-pandemic. We think it's introduced new consumers to our brands. And we think we're now in the consideration set for takeout and delivery in a way that we weren't before, because we demonstrate our ability to deliver. So one of the best for the future is certainly off-premise dining, facilitated by our investment in digital and things like that.

Thank you. And that is the time that we have for questions today. I would know like to turn the conference back to Mr. John Peyton for any closing remarks.

Just want to say thank you to all of you for your questions. For Allison and me, this is our first time speaking with all of you, and we enjoyed it. I'm looking forward to the conversations throughout the day. And to our veterans, John and Jay, thanks as well for telling the story of your brand, and answering the question so well. And we appreciate all of your interest and investment in our company and look forward to talking to you throughout the day. Thanks very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you all for joining. You may now all disconnect.