Dine Brands Global, Inc. Q1 FY2022 Earnings Call

Good afternoon, everyone, and welcome to eHealth Inc Conference Call to discuss the Company's First Quarter 2022 Financial Results. It is now my pleasure to turn the floor over to Eli Newbrun-Mintz, Investor Relations Manager. Please go ahead.

Good morning, and welcome to Dine Brands' first quarter conference call. I'm joined by John Peyton, CEO; Vance Chang, 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 to be 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-Q filing. The forward-looking statements are as of today and assume no obligation to update or supplement these statements. We 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. I would like to highlight that all references to the same restaurant comparable sales will be relative to the prior year. We will no longer disclose comp sales relative to 2019 or 2020. With that, I'll turn the call over to John.

Thanks, Ken, and good morning, everyone. On behalf of John, Jay, and Vance, thanks for joining us for our first quarter earnings call. Q1 was a strong quarter with great results, and that's because our bold choices and smart investments are paying off. We're accomplishing so much, especially in this challenging environment. That's thanks to our focus on execution and innovation. I'm so glad many of you could attend our Investor Day in March. And based on the feedback we've heard, you see strength in our growth plan and the way our leadership team is aligned. Now turning to Q1. This morning, I'll cover our perspective on the macroeconomic environment, our results for the quarter, and our key initiatives for the rest of the year. We continue to operate in an environment of headwinds and tailwinds, as I described last quarter. During the quarter, IHOP and Applebee's both posted positive comp sales, and on-premise sales volume continues to recover. It appears for now that customer behavior remains a tailwind. We didn't see a significant decline in traffic or off-premise business due to inflation or gas prices last quarter. We continue to closely monitor the effect of the macroeconomic environment on customer behavior. We benefit from the fact that year-to-date average CPI inflation for food away from home continues to trail CPI inflation for food at home. So in a world with many dining options, this is favorable for Applebee's and IHOP, because both brands are strongly positioned in the value segment. Finally, understaffed hours due to challenges in recruiting labor remain an upside when all restaurants are able to return to 2019 hours of operations. That said, headwinds still persist: supply chain disruptions, food and fuel inflation, labor supply, all accelerated by the war in Ukraine. Nationwide, staffing remains about 90% of full capacity. This prevents restaurants from achieving full hours of operations and can slow table turns. We're working with franchisees to test front and back of house technologies that address labor productivity while also enhancing the guest experience. Regarding the cost of food ingredients at the restaurant level, we expect inflation of about 13% to 16% in 2022. In this environment, our purchasing co-op's first priority is to secure supply and lock in pricing contracts whenever possible. We've assembled a cross-functional team, including the co-op, our suppliers and distributors, our culinary beverage and operations teams, and our franchisees to aggressively pursue ideas to mitigate the impact on costs. This cross-functional team has already identified about 140 cost mitigation opportunities. Examples include to-go packaging, in-restaurant beer distribution systems, server tablets, high-efficiency ovens, and ultimate supply sources and new product specifications. At the same time, we're closely monitoring the impact of U.S. energy prices. Energy costs make up about 2.5% to 4% of our restaurant's cost depending on the region. Approximately 40% to 50% of our restaurants' energy costs are gas. Many of our franchisees lock in 1- to 3-year utility contracts in deregulated states, so they're protected from price increases in the short to medium term. I'll transition now to our Q1 results. Our performance during the quarter reflects the continued improvement in our business and the stability of our asset-light model. Average weekly sales for Applebee's and IHOP surpassed the comparable quarter for 2021 by 15% and 19%, respectively. We delivered top line growth of approximately 13%, recognizing revenue of $230 million. Gross profit increased by 9% to approximately $93 million, and adjusted EBITDA improved by 12% to $65 million. We opened 11 new restaurants globally, demonstrating that our franchisees are healthy and have an appetite for development. John and Jay will provide more details on comp sales, unit growth, and new sources of revenue. To conclude, I am bullish that our long-term strategy of bold choices and smart investments is working. While we protected our financial health as well as the health of our franchisees, we remain focused, nimble, and steadfast in the execution of our plans. The successful execution of our strategy is delivering tangible results as we enter 2022 stronger than ever and poised to own the upswing. With that, I'll turn it over to Vance to discuss the details of our financial performance.

Thank you, John. The execution of our long-term strategy and guest-focused actions continue to deliver solid results for the first quarter. On the top line, consolidated revenues rose 13% in Q1 versus the prior year, driven by strong franchise revenues, which grew 14% to $161.2 million compared to $141 million for the same quarter of 2021. The improvement was due to strong comp sales growth at both brands. Excluding advertising revenues, franchise revenues increased 13%. Rental segment revenues for the first quarter of 2022 improved by 10% to $28.8 million compared to $26.1 million for the same quarter of 2021. The favorable variance was mostly the result of franchisees' higher retail sales, which drove higher percent rental income for the quarter. For our company restaurant operations, sales increased approximately 10% to $39.4 million for the first quarter compared to $35.9 million for the same period of last year. This was mainly due to an increase in customer traffic from changes in operating capacity of the restaurants during the quarter. G&A for the first quarter of 2022 was $41.5 million compared to $39.9 million for the same quarter of last year. The variance was primarily due to increases in travel expenses, personnel-related costs, and professional services as we return to normal franchisee supporting activities. We anticipate our investment in G&A to further increase in Q2 through Q4 of this year as we continue to execute our strategy to unlock and support long-term sustainable growth. As an update, we are tracking in line with our full-year G&A guidance range of between $188 million and $198 million, including non-cash stock-based compensation and depreciation of approximately $30 million. For the first quarter of 2022, consolidated adjusted EBITDA was $65.2 million compared to $58.1 million for the same quarter of 2021. The increase was primarily due to the gross profit improvement in our business, as I just discussed. Finally, adjusted EPS for the first quarter was $1.54 compared to adjusted EPS of $1.75 for the same period of 2021. The variance was primarily due to a $10 million delta in income tax expense between the two quarters as we return to a normal effective tax rate in Q1 of '22 versus the significant tax benefit that we received during the same quarter of last year, partially offset by a $7.5 million increase in gross profit. Turning to the statement of cash flows, we had an adjusted free cash outflow of $10.1 million for the first quarter of 2022 compared to inflow of $30.7 million for the same quarter of last year, driven primarily by cash from operations. Cash used from operations for the first quarter of 2022 was $7.8 million compared to cash provided from operations of $30.6 million for the same period of 2021. The variance in cash flow was primarily due to a change in working capital. In Q1 of '21, our cash flow benefited from the one-time collection of franchisee deferral fees which we had granted during the initial phase of the pandemic. In Q1 of 2022, our cash flow reflected payments for a larger performance incentive compensation earned in 2021 versus the year prior, as well as larger marketing expenses incurred in Q4 but paid in Q1. CapEx for the first quarter of 2022 was $5.3 million compared to $2.4 million for the same quarter of 2021. We also repurchased common stock of $41.6 million and paid dividends of $14.6 million for the quarter, which I will touch on in more detail later. We finished the first quarter with total unrestricted cash of $294.7 million. This compares to unrestricted cash of $361.4 million at the end of the fourth quarter. With our current levels of cash on the balance sheet and the borrowing capacity available under our credit facility, we're confident in our ability to maintain our financial flexibility and ample liquidity. Even with returning $56 million back to shareholders during the quarter, our leverage ratio continues to stay healthy. As of Q1, it was 4.05x compared to 3.86x in Q4. Now I'll provide a summary of our capital allocation for the first quarter. We remain committed to returning cash to shareholders, as evidenced by a 15% increase in our first-quarter cash dividend of $0.46 per share, which was paid on April 1. Additionally, we purchased 588,108 shares for approximately $41 million in the first quarter of 2022 at a weighted average price of $70.45 per share. We will continue to use share repurchases as a key part of our overall strategy to deploy excess cash and increase total shareholder return over time. Lastly, I will confirm that we are still tracking to our previously announced financial performance guidance in G&A, CapEx, development, and EBITDA for 2022. To close, Q1 was a great start to 2022, building from our very strong finish to 2021. We're confident that our bold choices and disciplined investments will support long-term growth. With that, I'll turn it over to John Cywinski, who will share more on the Applebee's business.

Thank you, Vance, and good morning, everyone. Applebee's business momentum continued in Q1 with a 14.3% increase versus Q1 of last year and a 26.2% two-year increase versus Q1 of 2020, representing our fifth consecutive quarter of year-over-year comp sales growth. In the face of Omicron, January comp sales were up 17.6% versus 2021, February sales were up 25.1%, and to close out the quarter, March comp sales were up 5.5% versus Applebee's very strong March of 2021. From a Q1 Black Box perspective, we slightly trailed the CDR category on comp sales versus last year, but this requires additional context given Applebee's substantial overperformance in 2021 and very favorable two-year and three-year comp sales results. Given the inter-quarter COVID mismatches from both this year and last year, it may be helpful to focus on absolute dollar volumes for a true indication of brand performance. Last year's record-setting volumes averaged $50,500 per week. Given Omicron's impact to start the year, weekly sales dropped to $46,800 in January, volumes then accelerated to $54,800 in February and $57,600 in March, driven by organic demand as well as peak seasonality. It's worth noting that March represents Applebee's highest weekly sales volumes on record under Dine ownership. Additionally, this momentum continues to be reflected among key brand attributes where Applebee's leads the category on affordability, menu variety, convenience, to-go awareness, delivery awareness, and overall brand awareness according to our proprietary third-party tracker. In reviewing Applebee's Q1 sales mix, 72% of our business was dine-in, 14% Carside To-Go, and 14% delivery, with total off-premise sales averaging between $14,000 and $15,000 per week. Applebee's off-premise business is not only a core competency, but in 2021, it became a $1.2 billion convenience-driven business that is a genuine consideration within QSR and fast casual occasions. I should also note that approximately 70% of our Carside To-Go business is now digital, a combination of online orders and call center orders which come to our restaurants digitally through our point-of-sale system. Our goal is to approach 100% digital orders by year-end, which means no more over-the-phone order-taking by restaurant team members. On the delivery front, we completed Cosmic Wings' virtual brand expansion to DoorDash, and we're now in process and activating Grubhub. Applebee's on-premise business continued its strong and steady recovery with Q1 attaining 90% of our pre-pandemic dine-in sales volumes. I also expect an eventual dine-in tailwind from both our late-night business as well as our older guests as they gradually return to dining out this year. It's not surprising that we've become a bit younger over the past two years and certainly younger than our CDR peers, with Gen Z, millennial, and Gen X now accounting for 80% of Applebee's guests, with millennials representing our largest segment at 34%. We really love this demographic profile, which is much more similar to QSR than it is CDR, and we view Applebee's age, family, and ethnic diversity as core strengths relative to other casual dining brands. Now from an absolute pricing perspective, Applebee's franchisees increased menu prices between 5% and 6% in Q1. We continue to monitor these actions closely and believe the brand is well-positioned to navigate this inflationary environment, given our supply chain scale, our average check at the low end of the CDR continuum, and ongoing guest perceptions of Applebee's as the clear affordability leader. We talk often about this subject and our relative position in the marketplace with our franchise partners. These are 31 smart and strategic leaders who fundamentally understand the delicate balance of margin protection, guest affordability, and business momentum, and they continue to view this year as a meaningful market share opportunity for the Applebee's brand. On the development front, we expect to open approximately 6 traditional restaurants this year as well as 6 ghost kitchen restaurants. In addition, we plan to close less than 15 restaurants this year, marking a meaningful inflection point for Applebee's with the fewest number of closures in 10 years, putting us on track to deliver net new unit growth in 2023. I'm also pleased to report that we recently opened our fourth drive-through pickup window in Virginia, with approximately 15 drive-through planned conversions by year-end. In closing, we improved Applebee's average unit volume from $2.2 million in 2017 to $2.6 million in 2021. Looking forward, Applebee's remains exceedingly well-positioned to accelerate this growth. Following our recent spring franchise conference, where we shared our balance of year innovation plan, our confidence and optimism in partnership with our franchisees could not be higher. With that, I'll turn it to Jay for an overview of the IHOP brand.

Thanks, John. I'm sure you're proud of everything that you and your franchisees have accomplished this quarter. I'm equally pleased with IHOP's achievements. Good morning, everyone. As we rolled over the start of our recovery last year, IHOP delivered an impressive first quarter based on several metrics. Comp sales increased by 18.1%, driven by positive comps across all dayparts, particularly late night and breakfast. Despite the Omicron wave, January comp sales were up 24.9% versus 2021, February up 28%, and March up 7.5%, despite rolling over the strongest month in the quarter of last year. Average weekly sales for the first quarter were approximately $36,000, an increase of 19% compared to the same period of 2021. Notably, average weekly sales volumes reached a weekly high for the quarter of approximately $41,000 in March 2022, exceeding every week in March 2021, which included the third round of stimulus payments from the IRS. On the off-premise front, our to-go business remains strong, accounting for 24.6% of sales comprised of 15.3% delivery sales and 9.3% in takeout sales. Importantly, off-premise average weekly sales volumes were approximately $8,900, still more than double pre-pandemic levels and highly incremental as our dine-in business continues to gradually improve. Dine-in accounted for 75.4% of sales for the first quarter. While we're enthusiastic about our results this quarter, we're doing more to build on our success. We've improved our marketing strategy and capabilities after completing the most comprehensive research the brand has ever done to discover what it is that people love about IHOP. Ultimately, our brand is a destination for joy. We're taking a three-pronged approach to our marketing strategy by: first, positioning our brand in a relevant way by focusing on the quality of our made-to-order food and the joyful atmosphere that IHOP provides; second, we're taking an omnichannel approach to meet our guests in the channels they frequent and trust. Our plan is designed to engage our guests, both new and old through online, mobile, social media, traditional TV, and more; and lastly, enhancing our one-to-one relationships with our guests with the recent launch of our unique loyalty program. To help us tie this all together, we announced a selection of our new ad agency of record, Pereira O'Dell, with whom we partnered on our new campaign and tagline, 'let's put a smile on your plate.' The inspiration for the campaign was based on the happiness guests feel when enjoying our great IHOP food. We believe this campaign will be a differentiator because it encapsulates the strategic new phase for the brand, which includes launching not only a new campaign but also our new ihop.com website and mobile app and, of course, our new loyalty program, the International Bank of Pancakes. As I discussed with you at our Investor Day, this is a true earn-and-burn program, designed to enhance our direct relationship with our guests and ultimately drive additional visits to IHOP. The program is a one-of-a-kind and first in our category. To briefly recap, it allows our guests to collect what we're calling pan coins, which is our pancake currency. Three pan coins will get you one short stack at IHOP, for example. Pan coins can be redeemed for menu items and other non-food items in the future. We began marketing the program in mid-April through social media, in-restaurant signage, national TV, and digital. Switching gears to an update on operations. Labor supply continues to be impacted by factors primarily outside of our control. At the end of the first quarter, IHOP was approximately 90% staffed nationally based on input received from our franchisees. I'd like to highlight that there is a degree of variability, though, with some areas doing better than others. Regarding SOP hours, the percentage of our domestic restaurants that are open for standard operating hours or greater improved approximately 91% from approximately 86% last quarter. We continue to expect potential upside to sales as additional progress is made. On our to-go business, we made operational improvements to our off-premise platform. We recently completed the implementation of Flybuy, which enhances our curbside pickup and delivery platforms and reduces guest friction. Flybuy provides our guests with the ability to alert us through the IHOP app that they've arrived in the parking lot for their to-go orders. Turning to development, our franchisees opened 10 new restaurants globally in the first quarter, of which 8 were domestic openings. I'm optimistic about our development outlook due to the multiple formats we can offer franchisees and the overall health of the brand. In addition to our brick-and-mortar footprint, we also expanded our presence through virtual brands. We recently announced the test of our first virtual brands through our partnership with NextBite, Super Mega Dilla and Thrilled Cheese. As of today, our virtual brands are available through 280 restaurants, up from 80 at the end of Q1. We're still on track for about 1,000 restaurants to activate virtual brands over the next several months. To wrap up, we've accomplished a great deal in early 2022. As we continue to transition to the next phase of the brand, I'm very enthusiastic about our road ahead. I'll now turn the call back over to John Peyton for his closing comments.

Thanks, Vance, and John and Jay, your comments made it super clear that we're laser-focused on the three levers of growth for Dine. We're focused on comp sales, we're focused on unit growth, and we're focused on developing new sources of revenue. The work that you and your teams did led to a terrific quarter, and thank you for that. Operator, we're now ready to open the call for questions.

Thank you. Ladies and gentlemen, I would like to clarify that this is the Dine Brands Global First Quarter Earnings Conference Call. Our first question or comment comes from the line of Eric Gonzalez from KeyBanc Capital Markets.

I just have a macro question here. Based on what you know about the consumer and potential macro pressures in the future, what does your gut tell you about your ability to sustain the really strong sales momentum later this year and into '23? And how important will value be as you balance that against the low to mid-teens inflation outlook?

Eric, this is John from Applebee's. Confidence is high on ability to sustain. None of our metrics here suggest anything other than robust growth. Average unit volumes accelerated throughout the quarter. Attributes are at all-time highs. Our consumer, we believe, given our average check is well, and our franchisees are really bullish. On your second question, value is essential. We're a value brand. Affordability we lead, and you'll see a balance of what I'll call emotional connection opportunities for the brand, as well as value propositions that are maybe a bit more overt, all with healthy profit margins for our franchisees. In a nutshell, very bullish on what the balance of this year represents for the Applebee's brand.

Eric, it's John Peyton. I'm going to jump in for a moment and give you some statistics that I think are worth sharing here that apply to both brands. And we've talked about headwinds and tailwinds, right? Implied in your question is the challenge right now of predicting the future when we see things like inflation, cost of fuel going up, uncertainty in supply chain, all exacerbated by the situation in Ukraine. At the same time, there is some encouraging data. For one thing, the cost of eating at home via grocery is rising faster than the cost of dining out, right? So that's a tailwind for us. And I think that, in part, drives our success in Q1 that John alluded to. The other thing is that QSR menu pricing is increasing faster than CDR, which is also favorable for us. When we look at wage growth, the bottom quartile of earners in the U.S. actually grew wages faster than the other three quartiles, which tends to be our customer. They grew at a 5% to 6% last quarter, giving them some confidence in a time when prices are rising. In this moment of headwinds and tailwinds, there is some compelling data from a consumer standpoint that explains, I think, our success in the first quarter and may give us momentum for the rest of the year. Lastly, we continue to review all the third-party research, as well as our own, about consumers' intent to return to restaurants, and that remains incredibly high.

That all makes sense. And maybe if you could just touch on franchisee profitability. Given that inflation outlook, and you mentioned the 5% to 6% at Applebee's, which likely offsets the commodity side and maybe have a little bit of labor. Can you just talk about where we stand or how franchisee profitability looked and how you expect that to trend through the year, given that inflation outlook?

Yes. Vance, why don't you take that?

Sure, Eric. So as you know, we don't report franchisee financials, but here's what we do know. We are seeing strong same-store sales and AUV. There's no bad debt, no AR issues. We have interest from franchisees in development, and franchisees have taken appropriate menu pricing adjustments. One last thing that's worth mentioning is that our co-op supply chain has formed a cross-functional team with our operations, our franchisees, and beverage and food teams to come up with over 140 cost item– cost-saving ideas to lower production costs and reduce food waste or usage while not negatively impacting the guest experience. Overall, those are the facts we could share, and things are looking– we're cautiously optimistic about the outlook.

Our next question or comment comes from the line of Jeffrey Bernstein from Barclays.

A couple of questions. One, just on the healthy comps you talked about. I think you acknowledged that March appeared to have been a slowdown on a one-year basis. So just trying to get your perspective on that two-year, obviously, removing seasonality and whatnot. But just any concern about that March slowdown? I was actually based on AWS as much the best of the quarters, best of the months. And any color you could provide on April, just to get us more current would be great. And then I have a follow-up.

Jeffrey, this is Jay Johns at IHOP. I can say from my brand's standpoint this was fairly well expected. If you just look at the rollovers from the previous year, both of the March's. Think about two years ago, the pandemic just began, which impacted that March, which meant that last year, we were already up quite a bit, and that's when the recovery really started rolling over the original pandemic. So, March's results last year were ticking up tremendously compared to January and February. It's pretty natural to expect a slowdown this year as the recovery continued. But I think from our standpoint, the recovery is continuing nicely and was pretty much in line with what we had expected as we went into the month of March. We knew that it was going to drop down compared to January and February, as a lot of the country was still shut down last year in January and February. If anything, January was probably negatively impacted because of Omicron, which should have been up even more if it wasn't for that.

And Jeff, with respect to Applebee's, no indication of a slowdown whatsoever. Two-year comps are very strong, including March, as are our three-year comps.

Any color to provide on the month of April or referring from any intra-quarter comment?

No color here.

Jeff. It's John. We're going to refrain.

Got you. Okay. And then just on the virtual brands that you mentioned, obviously, Cosmic has been around for a little while. I'm just wondering whether you can share any greater financial metrics in recent months. Obviously, dine-in is returning, so maybe there's some easing of virtual. And then in the early test results on both IHOP brands, which seem really exciting that you have that second make line and a whole lot of afternoon, evening available capacity. So any early learnings on the IHOP virtual brands would be great.

Jeff, John C. here with respect to Cosmic Wings, I'll resist providing any detailed sales-wise since we're still in process on expanding this to our third delivery partner. We'll have a pretty good handle on this business by Q2, but I'll resist at this point.

This is Jay at IHOP again. On our virtual brands, we're really excited about the way this has begun. It's a little soon to predict what’s going to happen as we expand in more and more restaurants. But we're still very bullish on the way this looks. I shared that at Investor Day, those first test restaurants that these two brands were each doing around $1,000 a week in sales per restaurant, and now we've expanded to 280 restaurants. So it's expanding rapidly. Within the next several months, we have the potential to get up to about 1,000 restaurants on the program. As we expand out further, this may drop slightly, but it's maintaining pretty well.

Got it. And just lastly, specific to Applebee's. I know you guys have talked about the big pivot to net unit growth next year. I'm wondering if you can share to what magnitude and maybe where international falls within this. It would seem like international is a huge opportunity for your brand? But it doesn't seem like it's as much of a growth vehicle or at least not talked about as much.

Jeff, John C. here. I'll speak domestically. International by the way is a meaningful growth opportunity. Domestically, our confidence level is high on returning to net new unit growth in '23. We'll come pretty close this year, but I referenced the detail for 2022. We're reestablishing a pipeline. We know where those trade area opportunities are, particularly the very high-volume trade area opportunities. We have a new prototype. We have franchisee demand. Our expectations are not only to return to net new unit growth in '23, but then to accelerate that level of development on an annual basis moving forward in the U.S.

And Jeff, it's John Peyton. Just a comment on International. The mix for international growth, you may recall from Investor Day, is about two-thirds or more for IHOP, and the mix internationally is a greater proportion of ghost kitchens as well. Our goal there, our aspiration is to go from about 200 restaurants internationally to 500 over the next four years.

Our next question or comment comes from the line of Jake Bartlett from Truist Securities.

Mine was really on the consumer, and thanks for the macro perspectives. And I did hear in the comments, I think maybe focus on a little more value at Applebee's. So I'm just wondering if you could expand on that, what your approach is for the rest of the year? And whether if it is a bit of a more weight towards the value side. Is that because you are seeing some trade down in the menu or any sort of impact from that maybe lower income consumer?

Jake, John C. Regarding Applebee's, we love our guest profile, as I referenced. The average household income is about $75,000. We're at the lower end of the average check continuum, as I mentioned. There are a number of ways to deliver value. Some of those are overt. In March, we offered 5 bonus wings per buck with any handcrafted burger, which performed very well for Applebee's. There are other opportunities to connect emotionally. In January, February, we really wanted to reach our regulars, our most loyal guests. There were no actors or actresses in those ads. They were incredibly popular among our guests, and they resonated in January and February with America. So whether it's value-added, whether it's overt, whether there's some co-branding or perhaps even entertainment-based propositions moving forward, we have clear visibility to our innovation pipeline and the ability to be very nimble and change course as needed, as we've done over the past two years. We will deliver value, and we'll do it in a number of creative and innovative ways at Applebee's, always with our finger on the pulse of that guest who has reasonably limited discretionary income at the moment.

Great. That's helpful. And my next question is for Jay on Applebee's. You mentioned the opportunity for hours and recovering the hours that have been lost. What is the opportunity in breakfast? If you can talk about where breakfast sales stand maybe on an average weekly sales basis versus 2019 in relationship to overall, obviously, I think my math is down about 5% in the first quarter. How much room is there to recover in breakfast still?

This is Jay. We've got opportunities across the board to continue to work on our comp sales as we move forward. Breakfast has recovered more than any other daypart for us right now, though. So breakfast is strong. Think about it— that is what we're most known for. It's probably what our guests were missing the most about IHOP if they hadn't been in a long time. The pandemic caused everyone to shut down, and I think that negatively impacted our breakfast business as well. As people are getting back out, even though there's a lot of flex work now and people may not be going to work as many days as they were in the past, they are back out now, which shows how strong breakfast can be. We just aren't sure how impactful the headwinds are preventing our recovery from being even bigger and faster. There are still plenty of opportunities both on the weekend breakfast, which gets negatively impacted if a restaurant isn't fully staffed, and you can't turn tables as quickly and get through those restaurants if you're not staffed on the weekend. That's where our weekend breakfast opportunity lies. Weekday breakfast too has opportunity because people are getting back to work but not in the same quantity as before. The shift in breakfast behavior has changed, but we still see considerable upside, both on weekends and weekdays.

Our next question or comment comes from the line of Brian Vaccaro from Raymond James.

Could you provide the monthly average weekly sales at IHOP like you did at Applebee's? And I guess, just talk about how the brand performed exiting Omicron. I'm thinking about multiyear stacks back to '19, and it seems like March maybe didn't come back as strong as some other sectors have. Any broader thoughts on why that might be and any changes in behavior for the IHOP core consumer that might be worth highlighting?

Thanks, Brian, for the question. I don't have those at my fingertips. But for the whole quarter, I think it was about 36,000 a week on average. We topped out at about 41,000 in March, so it continued improving after we got past Omicron. We struggled a bit in the first few weeks because of the Omicron variant compared to prior years. So if you look at our averages, I can quickly tell you that in January we averaged about $32,000, then in February $36,000, and March was almost $39,000. You can see it kept building once we got past Omicron.

Right, right. Yes. No, definitely focused more on average weekly sales than the comps given the lapse and recovery we proceeded into in the spring of last year. On commodity inflation, I wanted to just circle back on that as well. Can you share what the year-on-year inflation was for each brand in the first quarter? And then just sort of how each brand expects this to play out in terms of inflation considering the differences in their baskets for 2022?

Yes. Yes, Brian. For the first half, Applebee's is probably expecting 22% inflation, and IHOP about 20% inflation for the first half. That moderates somewhat in the second half, so year-over-year inflation likely gets down to low teens in the second half of the year. Overall, averages out to about 13% to 16% for the year is what we're expecting for the whole brand.

Okay. Great. That's helpful. And then last one for me. I wanted to just ask about menu pricing. I heard you say that Applebee's recently took 5% to 6%. What does that bring the year-on-year pricing to? Could you just clarify that? And then also speak to the level of menu pricing on the IHOP side?

Sure, Brian. Applebee's, on average, took a 5% to 6% increase in Q1, and they were very measured and thoughtful moving forward. Last year, it was probably about a 3% to 4% increase. So, looking on a two-year basis, they're clearly attempting to balance margin protection while continuing to deliver great value for the guests. I think they've been very successful, and I anticipate that success will continue.

Yes, this is Jay. On the IHOP side, if you look at year-over-year pricing for Q1 this year versus Q1 last year, it increased by 7.9%.

Our next question or comment comes from the line of Nick Setyan from Wedbush Securities.

Can you just remind us of the historical seasonality relative to March in terms of average weekly sales in April, May, and June for both brands?

Sure, Nick. For Applebee's, March is our highest volume month. As you look at the flow of sales volume across the year, March would likely be our highest volume month, and September, perhaps, our lowest volume month. That's a good way to think about it, with indices that range from around 90 to 110 depending upon the month.

For IHOP, we don't have any true seasonality overall. Individual months may vary a bit, and March is typically one of our busier months. The spring break weeks, kids are out of school, tend to help in March. Going back to school at the end of August and September also tends to be a slower time, but it's probably not material for us.

And then what about marketing rates throughout the year? Any quarter stand out in terms of maybe a higher marketing weight within that quarter versus some others for each brand?

We're deploying $130 million to $140 million in working media on an annual basis, pretty evenly dispersed by quarter and up a bit versus last year on a full-year basis. We leaned into a heavier mix of 30-second ads in January and February in Q1, in bringing to life those ads I referenced called the regulars that really resonated. There was probably a slightly heavier dollar spend in January and February versus a year ago because of that 30-second ad investment, but very balanced year-over-year and quarter-over-quarter as we look at the balance of the year.

On the IHOP side, we try to spread this out fairly evenly throughout the year and even more so now. We've changed our strategy to more of an omnichannel strategy. This enables us to not just be on national TV, but to deliver different messages to different audiences at different times to try to move all of our dayparts for various events or reasons. And in doing that, the philosophy we have is an always-on marketing stream. Because of that, spending is pretty evenly throughout the year.

Our next question or comment comes from the line of Brett Levy from MKM Partners.

Just two questions largely against about sales and capacity. First, if you could just give a little bit more color since such great scale on demand and operational challenges nationwide? Specifically on operations, you both mentioned the 90% of Standard Operating Procedure (SOP). How crucial is it to get that last 10%? And what kind of sensitivity do you see in terms of incremental sales and profitability if you're able to get there?

Thanks. This is Jay. There is variability across the country for shutdowns and recovery, which causes significant fluctuations in recovery. For example, a certain location is performing very well; it was one of the last to reopen, which significantly affected last year's rollout. In more stable regions, particularly in the Southeast, the closure impacts were less severe, resulting in more challenging rollovers this year. Regarding staffing levels and the final 10% needed, it has been difficult to find the right people willing to work the overnight shift. To restore those overnight business hours, we need to hire more staff, which is affecting total sales volumes.

Our final question comes from the line of Todd Brooks from Benchmark.

Just one question. If we look at the 90% staffing to plan that both brands communicated, if you look at the three buckets: applicant flow, training people up, onboarding, getting them experienced enough to be able to man maybe a late-night shift and retention, where do we stand on each of those buckets? And where is the opportunity to really move this needle? It feels like, kind of industry-wide, we're leveling out in these kind of low 90% of targeted staffing levels. I'm wondering where you see the most opportunity within those three buckets.

Todd, John C. Regarding Applebee's, we held a national hiring day. Applicant flow was really great, significantly higher than when we executed that in the prior year. Our need quite candidly was lower, meaning we're in a good position. Our restaurants can be fairly selective. Training is strong. Again, that comes back to culture, which is equally strong. Retention is always a challenge in this environment. I don't want to paint an overly rosy picture, but I'm pleased with our staffing levels. It allows us to execute everything that we're contemplating, including perhaps even late-night propositions, which have been a challenge last year.

On the IHOP side, finding qualified staff that we want to hire is probably still our biggest challenge. You can get a lot of applicants, but not everyone is qualified to work for us. The pickings are thinner than they used to be. We have really good training programs, and we can train people quickly. But our biggest challenge remains finding the right staff, especially for the overnight hours, as that's another reason we haven't been able to open these hours back up as quickly as we'd like. But once things crank, that will help re-establish staffing.

I’m showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Thanks, Howard, and thanks to our team for a great quarter. Thanks to all of you for your good questions today. We appreciate it. I know we'll be on the phone with some of you later today as well to go a little bit deeper. So thanks for the time you spent with us this morning, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.