IHOP Reports 37% Q2 Profit

IHOP Corp. (NYSE:IHP) today announced financial results for the second quarter and six months ended June 30, 2007, which included the following performance highlights:

• Net income per diluted share for the second quarter 2007 was $0.82, which increased 46.4% primarily due to a 7.1% decrease in General & Administrative (G&A) expenses, a lower effective tax rate and a 5.7% decrease in diluted weighted average shares outstanding due to ongoing share repurchases.

• IHOP produced its 18th consecutive quarter of same-store sales growth with an increase of 2.5% for the second quarter 2007. This growth was driven by higher guest check averages, partially offset by declines in guest traffic during the quarter.

• IHOP franchisees developed and opened 15 new restaurants during the second quarter 2007. System-wide restaurants grew 4.4% year-over-year for a total of 1,319 IHOPs.

• Cash Flows from Operating Activities for the first six months of 2007 totaled $23.6 million. Additionally, $8.3 million of cash was provided by the collection of the Company's long-term receivables for the first six months of 2007.

• Share repurchases aggregated $39.4 million for the second quarter 2007, or approximately 677,000 shares of IHOP stock.

Julia A. Stewart, IHOP's Chairman and Chief Executive Officer, said, "We are very pleased with our performance for the second quarter 2007 as it demonstrates our proven financial formula for success: driving top line sales through new franchise restaurant openings and same-store sales growth while moderating G&A expenses and continuing share repurchases. This fundamental financial formula is designed to optimize our low risk, high cash flow franchise business model and allows for the deployment of our capital in ways that enhance shareholder value."

Second Quarter 2007 Performance

IHOP reported an increase of 37.1% in net income to $14.1 million, and a 46.4% increase in diluted net income per share to $0.82 for the second quarter 2007 compared with the same quarter in fiscal 2006. The increases in net income and diluted net income per share resulted primarily from a 7.1% decrease in G&A expenses and a 10.2 percentage point decrease in the Company's effective tax rate primarily due to a one-time reduction of certain tax contingency reserves. The Company's effective tax rate decreased to 29.9% in the second quarter 2007 as compared to 40.1% in the same quarter last year. Additionally, a 5.7% reduction in diluted weighted average shares outstanding, due to share repurchases by the Company made over the past 12 months, contributed to IHOP's per share earnings performance for the second quarter 2007.

For the six months ended June 30, 2007, IHOP reported an increase of 11.1% in net income to $25.4 million, and an increase of 16.1% in diluted net income per share to $1.44. The increases in net income and diluted net income per share resulted primarily from a 7.0% increase in Franchise Operations segment profit and a 5.8 percentage point decrease in the Company's effective tax rate primarily due to a one-time reduction of certain tax contingency reserves. The Company's effective tax rate decreased to 33.2% in the first six months of 2007 as compared to 39.0% in the same period last year. Additionally, a 4.4% reduction in diluted weighted average shares outstanding due to ongoing share repurchases by the Company contributed to IHOP's per share earnings performance for the first half of 2007. IHOP's net income and net income per diluted share performance for the first six months of 2007 were affected by the costs related to the write-off of deferred financing costs and a pre-payment penalty on the Company's prior debt associated with its $200 million securitized refinancing completed in March 2007. Excluding these costs, net income would have increased 17.6% to $26.9 million, while diluted net income per share would have increased 22.6% to $1.52.

G&A expenses decreased 7.1% to $14.1 million for the second quarter 2007 compared with the same quarter in fiscal 2006, and remained flat at $30.2 million for the first six months of 2007 compared with the same period in fiscal 2006. The quarterly decrease was primarily due to decreased travel and conference expense as well as lower costs related to the Company's performance share plans for its executive management team. However, the expenses associated with this benefit program are tied in part to the Company's stock price performance and may change with future movements in IHOP Corp. stock price.

Cash Flows from Operating Activities decreased 22.4% for the first six months of fiscal 2007 to $23.6 million compared with $30.4 million for the same period in fiscal 2006. This decrease was primarily related to the timing of tax payments in the second quarter 2007. Principal receipts from notes and equipment contracts receivable, which are an additional source of cash generation for the Company, amounted to $8.3 million for the six months of fiscal 2007. Capital expenditures decreased to $1.4 million for the first six months of fiscal 2007 compared with $3.9 million for the same period in fiscal 2006. The decrease in capital expenditures primarily reflects a reduction in restaurant development costs consistent with the Company's plan not to open any IHOPs in its dedicated Company market in Cincinnati, Ohio, in 2007.

For the three months ended June 30, 2007, system-wide same-store sales increased 2.5%, which reflected solid growth given a continuing difficult consumer environment and increased competition at the breakfast daypart. During the second quarter 2007, IHOP experienced an increase in guest check average primarily due to the cumulative effect of menu price increases taken in 2006, while guest traffic declined during the quarter.

2007 Performance Guidance

On July 16, 2007, IHOP Corp. announced it had reached a definitive agreement to acquire Applebee's International, Inc. for $25.50 per share in cash, representing a total transaction value of approximately $2.1 billion. The transaction is expected to close some time in the fourth quarter 2007. While the Company remains comfortable with its existing performance guidance for 2007 as it relates to its IHOP business, IHOP is suspending its fiscal 2007 earnings guidance as current guidance does not take into account the effect of the Applebee's acquisition on full year results.

The acquisition not withstanding, IHOP reiterated its key performance assumptions for fiscal 2007. The Company expects same-store sales growth between 2% and 4%, the addition of 61 to 66 new franchise restaurants to the IHOP system, moderate G&A spending in the range of $65 million to $67 million, and the effect of share repurchases executed in the first half of fiscal 2007 to contribute to its per share earnings performance for fiscal 2007.

Cash from Operations is expected to range between $60 million and $65 million in 2007, and principal receipts from note and equipment contracts receivable are expected to be within the range of $16 million to $18 million. Capital expenditures are expected to range between $6 million and $8 million in 2007. This primarily reflects investment in the Company's Information Technology infrastructure and construction related to the opening of additional restaurants in IHOP's Company market in Cincinnati, Ohio, in fiscal 2008.