IHOP Corp. Reports Fourth Quarter and Fiscal 2003 Results

February 26, 2004 at 7:01 AM EST
    GLENDALE, Calif.--(BUSINESS WIRE)--Feb. 26, 2004--

     Earnings Per Share of $1.70 Meets Company's 2003 Performance
  Expectations as IHOP Successfully Transitions to New Business Model

IHOP Corp. (NYSE:IHP) today announced results for its fourth quarter and fiscal year ended December 31, 2003.

Fourth Quarter and Fiscal 2003 Performance

The Company reported a 26.4% decrease in net income to $8.8 million, or a decrease of 26.8% in diluted earnings per share to $0.41 in the fourth quarter 2003, compared with net income of $12.0 million, or diluted earnings per share of $0.56, in the fourth quarter 2002. This decrease is attributable to the reduction in the number of IHOP-developed restaurants franchised in the fourth quarter as the Company transitioned to its new business model. For the twelve months ended December 31, the Company reported a decrease of 10.0% in net income to $36.8 million, and a decrease of 11.5% in diluted net income per share to $1.70 in 2003, compared with net income of $40.8 million, or diluted net income per share of $1.92, in 2002. IHOP's net income and diluted net earnings per share performance was impacted during the year by charges of $9.1 million, or $0.26 per diluted share, associated with the Company's reorganization. Excluding these charges, net income for 2003 would have increased 3.9% to $42.5 million, or 2.1% in diluted net income per share of $1.96.

Julia A. Stewart, IHOP Corp. President and Chief Executive Officer, said, "In a single year's time, we have truly demonstrated the power and potential of the IHOP brand by successfully executing the Marketing, Operations, Training and Development strategies we introduced at the beginning of 2003. In our journey to become number one in family dining, we achieved strong annual system-wide and same-store sales growth by marketing our brand in new and creative ways; we produced record breaking promotional sales by offering unique products that created reasons for guests to visit more often; our improved operational focus and enhanced training efforts provided for a great experience every time a guest came to IHOP; and we have signed agreements and pending commitments for our franchisees to finance and develop nearly 230 new IHOP restaurants over the next several years. These are terrific accomplishments in the first year of re-energizing our system, and we look to continue the momentum we have created throughout 2004."

IHOP's net income per diluted share performance of $1.70 for the full year met the Company's previous guidance range of $1.65 to $1.75 for fiscal 2003, inclusive of reorganization charges.

System-wide sales increased 14.6% in the fourth quarter and fiscal year ended December 31, 2003, over the same periods in 2002. The sales increase is primarily the result of growth in the number of effective restaurants and an increase in average sales per effective restaurant. Effective restaurants grew by 7.7% in the fourth quarter and 8.5% for the twelve months ended December 31, 2003, over the same periods in 2002. Average sales per effective restaurant increased 6.3% in the fourth quarter and 5.6% for 2003 over the same periods in 2002.

System-wide comparable store sales increased 6.0% for the fourth quarter, and reflected the positive impact of IHOP's Stuffed Crepes product promotion during the quarter. For the twelve months ended December 31, 2003, comparable store sales increased 4.8%. These comparable store sales results reflect IHOP's largest sales gains in the last 43 quarters and last 10 years, respectively. Comparable store sales figures are calculated on an 18-month basis.

Fourth Quarter and Fiscal 2003 Highlights

The following are business highlights for the fourth quarter and fiscal 2003:

    --  The strength of IHOP's "Come hungry. Leave happy." Marketing
        campaign achieved international recognition, winning a bronze
        Medallion at the 2004 AME Awards for Advertising and Marketing
        Effectiveness. The award recognizes the effectiveness, as well
        as the creativity, of advertising and marketing on a global
        scale.

    --  The Company's mystery shop initiative continued with more than
        15,000 restaurant evaluations as of the end of the fourth
        quarter. Since the program's introduction in June 2003, IHOP
        has experienced statistically significant improvements in its
        mystery shop scores. These results point to the success of
        IHOP's renewed focus on both operational excellence and
        enhanced training programs at the restaurant level.

    --  IHOP's focus on improving the performance of marginal
        operators continued with notable improvements in the number of
        highly ranked operators at year end, as well as the removal of
        marginal operators from the IHOP system.

    --  The reduction in net income performance for the fourth quarter
        2003 was primarily due to the Company franchising 30 fewer
        newly developed IHOP restaurants in the fourth quarter 2003
        versus the fourth quarter 2002.

    --  While IHOP developed 30 fewer restaurants in the full year
        2003, the actual number of restaurants franchised increased by
        four due to the success of its re-franchising efforts. IHOP
        ended the year with 44 Company-operated restaurants compared
        to 76 at the end of 2002, and plans to continue its
        re-franchising strategy in 2004.

    --  The Company significantly improved its free cash flow position
        (cash flow generated from operating activities less capital
        expenditures) to negative $9.2 million at year end as compared
        to negative $63.6 million in 2002. This compared favorably to
        IHOP's previous expectations of generating free cash flow in
        the range of negative $25 million to negative $15 million
        during 2003. IHOP's improving free cash flow position
        demonstrates the beneficial effect of its new business model
        and reduced capital expenditures related to Company-financed
        restaurant development.

Stewart said, "While we clearly achieved great results during the past year, we have only just begun to realize the power of our brand. In 2004, we will deliver the promise of a great guest experience by continuing to optimize and enhance the strategies responsible for re-energizing our system to date. We will continue with appealing promotions, great advertising and superior operational execution, especially focusing on the areas of service. There remains tremendous upside in the execution of our strategies, and we are dedicated to capturing these opportunities in 2004."

2004 Guidance

Reiterating its previous guidance, IHOP expects net income per diluted share for 2004 to range between $1.65 to $1.75.

Investor Conference Call

IHOP will host an investor conference call to discuss its fourth quarter and fiscal 2003 results today, Thursday, February 26, 2004, at 11:00 a.m. ET (8:00 a.m. PT). To participate on the call, please dial 800-901-5213 and reference pass code 29272157. A live webcast of the call can be accessed on the Investor Relations section of IHOP's Web site at www.ihop.com. Participants should allow approximately ten minutes prior to the call's start time to visit the site and download any streaming media software needed to listen to the webcast. A telephonic replay of the call can be accessed through Thursday, March 4, 2004, by dialing 888-286-8010 and referencing pass code 85938194. An online archive of the webcast will be available on the Investor Relations section of IHOP's Web site.

About IHOP Corp.

The IHOP family restaurant chain has been serving a wide variety of breakfast, lunch and dinner selections for 45 years. Offering more than 16 types of pancakes, as well as omelettes, breakfast specialties, burgers, sandwiches, chicken and steaks, IHOP's diverse menu appeals to people of all ages. IHOP restaurants are operated and franchised by Glendale-based IHOP Corp. As of December 31, 2003, the end of IHOP's 2003 fiscal year, there were 1,165 IHOP restaurants in 48 states and Canada. IHOP is publicly traded on the NYSE under the symbol "IHP." For more information, call the Company's headquarters at 818-240-6055 or visit the Company's Web site located at www.ihop.com.

Forward-Looking Statements

There are forward-looking statements contained in this news release. They use such words as "may," "will," "expect," "believe," "plan" or other similar terminology. These statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results to be materially different than those expressed or implied in such statements. These factors include, but are not limited to: risks associated with the implementation of the Company's new strategic growth plan, the availability of suitable locations and terms of the sites designated for development; legislation and government regulation, including the ability to obtain satisfactory regulatory approvals; conditions beyond IHOP's control such as weather, natural disasters or acts of war or terrorism; availability and cost of materials and labor; cost and availability of capital; competition; continuing acceptance of the International House of Pancakes' brand and concepts by guests and franchisees; IHOP's overall marketing, operational and financial performance; economic and political conditions; adoption of new, or changes in, accounting policies and practices; and other factors discussed from time to time in IHOP's filings with the Securities and Exchange Commission. Forward-looking information is provided by IHOP pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these factors. In addition, IHOP disclaims any intent or obligation to update these forward-looking statements.

                      IHOP CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF OPERATIONS
                    PERIOD ENDED DECEMBER 31, 2003
               (In thousands, except per share amounts)

                                   Three Months    Twelve Months Ended
                                   Ended Dec. 31,        Dec. 31,
                                 ----------------- -------------------
                                  2003     2002      2003      2002
                                 -------- -------- --------- ---------
                                    (Unaudited)
Revenues
Franchise revenues               $35,862  $32,117  $140,131  $123,050
Rental income                     30,370   26,047   117,258    99,595
Company restaurant sales          14,053   19,023    74,880    74,433
Financing revenues                22,483   30,205    72,536    68,796
                                 -------- -------- --------- ---------
 Total revenues                  102,768  107,392   404,805   365,874
                                 -------- -------- --------- ---------
Costs and Expenses
Franchise expenses                16,636   14,117    64,265    55,139
Rental expenses                   22,763   19,583    86,620    73,812
Company restaurant expenses       16,851   20,799    81,737    78,422
Financing expenses                15,583   19,241    43,619    38,185
General and administrative
 expenses                         16,002   12,850    54,575    49,526
Other (income) expense, net          388    1,676     6,054     5,433
Reorganization charges               461       --     9,085        --
                                 -------- -------- --------- ---------
 Total costs and expenses         88,684   88,266   345,955   300,517
                                 -------- -------- --------- ---------
Income before income taxes        14,084   19,126    58,850    65,357
Provision for income taxes         5,281    7,172    22,068    24,509
                                 -------- -------- --------- ---------
Net income                        $8,803  $11,954   $36,782   $40,848
                                 ======== ======== ========= =========

Net Income Per Share
 Basic                             $0.41    $0.57     $1.72     $1.95
                                 ======== ======== ========= =========
 Diluted                           $0.41    $0.56     $1.70     $1.92
                                 ======== ======== ========= =========

Weighted Average Shares
 Outstanding
 Basic                            21,357   21,152    21,424    20,946
                                 ======== ======== ========= =========
 Diluted                          21,579   21,334    21,614    21,269
                                 ======== ======== ========= =========

Dividends Declared Per Share       $0.25      $--     $0.75       $--
                                 ======== ======== ========= =========

Dividends Paid Per Share           $0.25      $--     $0.75       $--
                                 ======== ======== ========= =========


                      IHOP CORP. AND SUBSIDIARIES
                         RESULTS OF OPERATIONS
                        (Dollars in thousands)

                           Three Months Ended   Twelve Months Ended
                               December 31,          December 31,
                           ------------------- -----------------------
                             2003      2002       2003        2002
                           --------- --------- ----------- -----------
                               (Unaudited)
Restaurant Data
Effective restaurants(a)
    Franchise                   966       866         931         843
    Company                      56        79          72          76
    Area license                130       125         128         123
                           --------- --------- ----------- -----------
      Total                   1,152     1,070       1,131       1,042
                           ========= ========= =========== ===========

System-wide
  Sales(b)                 $426,127  $371,852  $1,695,026  $1,478,567
    Percent change             14.6%      8.9%       14.6%        9.9%
  Average sales per
   effective restaurant        $370      $348      $1,499      $1,419
    Percent change              6.3%      0.9%        5.6%        2.3%
  Comparable sales
   percentage change (c)        6.0%    (0.3)%        4.8%        0.9%

Franchise
  Sales                    $376,752  $322,100  $1,481,251  $1,278,103
    Percent change             17.0%      9.0%       15.9%       11.5%
  Average sales per
   effective restaurant        $390      $372      $1,591      $1,516
    Percent change              4.8%      0.3%        4.9%        1.5%
  Comparable sales
   percentage change(c)         6.0%    (0.3)%        4.8%        0.9%

Company
  Sales                     $14,053   $19,023     $74,880     $74,433
    Percent change           (26.1)%     13.1%        0.6%        8.2%
  Average sales per
   effective restaurant        $251      $241      $1,040        $979
    Percent change              4.1%      3.0%        6.2%        2.4%

Area License
  Sales                     $35,322   $30,729    $138,895    $126,031
    Percent change             14.9%      4.9%       10.2%      (3.7)%
  Average sales per
   effective restaurant        $272      $246      $1,085      $1,025
    Percent change             10.6%      2.5%        5.9%        2.6%

(a) "Effective restaurants" are the number of restaurants in a given
    fiscal period adjusted to account for restaurants open for only
    a portion of the period. It is calculated by dividing total
    restaurant operating days by 91 days for a quarterly calculation.
(b) "System-wide sales" are retail sales of franchisees, area
    licensees and Company-operated restaurants, as reported to IHOP.
(c) "Comparable sales percentage change" reflects the percentage
    change in sales for restaurants that have been operated for the
    entire fiscal period in which they are being compared and have
    been open for at least 18 months. Because of new unit openings and
    store closures, the restaurants opened for an entire fiscal period
    being compared will be different from period to period. Comparable
    average sales do not include data on restaurants located in
    Florida.


                      IHOP CORP. AND SUBSIDIARIES
            RESTAURANT DEVELOPMENT AND FRANCHISING ACTIVITY

                                           Three Months  Twelve Months
                                               Ended         Ended
                                            December 31,  December 31,
                                           ------------- -------------
                                           2003   2002    2003   2002
                                           ------ ------ ------- -----
RESTAURANT DEVELOPMENT ACTIVITY            (Unaudited)

IHOP-beginning of period                   1,149  1,063  1,103  1,017
  New openings
    IHOP-developed                            11     41     56     86
    Franchisee-developed                       6      3     13     10
    Area license                               1      1      5      5
                                           ------ ------ ------ ------
        Total new openings                    18     45     74    101
  Closings
    Company and franchise                     (2)    (4)   (12)   (13)
    Area License                              --     (1)    --     (2)
                                           ------ ------ ------ ------
IHOP-end of period                         1,165  1,103  1,165  1,103
                                           ====== ====== ====== ======

Summary-end of period
    Franchise                                991    902    991    902
    Company                                   44     76     44     76
    Area license                             130    125    130    125
                                           ------ ------ ------ ------
        Total IHOP                         1,165  1,103  1,165  1,103
                                           ====== ====== ====== ======

RESTAURANT FRANCHISING ACTIVITY
IHOP-developed                                21     41     72     80
Franchisee-developed                           6      3     13     10
Rehabilitated and refranchised                13      5     19     10
                                           ------ ------ ------ ------
        Total restaurants franchised          40     49    104    100
Reacquired by IHOP                            (1)    (4)   (11)   (10)
Closed                                        --     (4)    (4)   (11)
                                           ------ ------ ------ ------

        Net addition                          39     41     89     79
                                           ====== ====== ====== ======


                      IHOP CORP. AND SUBSIDIARIES
                      CONSOLIDATED BALANCE SHEETS
                        (Dollars in thousands)

                                            December 31,  December 31,
                                                2003         2002
                                            ============= ============

Current assets, net                             $127,081     $159,101
Property and equipment, net                      314,221      286,226
Long-term receivables:
  Notes receivable                                49,470       46,929
  Equipment contracts receivable                 174,737      153,261
  Direct financing leases receivable             129,829      132,602
Other assets                                      47,666       41,681
                                            ============= ============
Total assets                                    $843,004     $819,800
                                            ============= ============

Current liabilities                              $45,373      $53,564
Long-term debt                                   139,615      145,768
Other long-term liabilities                      275,656      256,079
Stockholders' equity                             382,360      364,389
                                            ============= ============
Total liabilities and stockholders' equity      $843,004     $819,800
                                            ============= ============


                      IHOP CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF CASH FLOWS
                        (Dollars in thousands)

                                                   Twelve Months Ended
                                                      December 31,
                                                     2003      2002
                                                   ========= =========

Cash provided by operating activities               $71,310   $78,112
Cash used in investing activities
   Additions to property and equipment              (80,545) (141,740)
                                                   ========= =========
                                                     (9,235)  (63,628)
   Investments in short-term marketable securities  (45,537)       --
   Additions to other assets, net                       655       170
Cash provided (used) by financing activities        (16,626)  155,945
                                                   ========= =========
Net change in cash and cash equivalents             (70,743)   92,487
Cash and cash equivalents at beginning of period     98,739     6,252
                                                   ========= =========
Cash and cash equivalents at end of period          $27,996   $98,739
                                                   ========= =========

    CONTACT: IHOP Corp.
             Tom Conforti, 818-240-6055
              or
             Stacy Roughan, 818-543-4138

    SOURCE: IHOP Corp.