IHOP 2010 Annual Report Download - page 62

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franchise operations; however, Applebee’s national advertising fund constitutes an agency transaction
and therefore is not recognized as franchise revenue and expense.
The increase in bad debt expense related primarily to a franchise operator of 40 IHOP franchise
restaurants that defaulted on its obligations in the fourth quarter of 2010. We have fully reserved all
amounts due from this franchisee as of December 31, 2010 which adversely impacted segment profit by
approximately $2.0 million. The significant majority of the amounts reserved related to receivables
incurred during the fourth quarter of 2010. The impacted restaurants are in the process of being sold
to an existing IHOP franchisee.
The 53rd week contributed additional franchise segment profit of approximately $5.9 million in
2009.
Company Restaurant Operations
Favorable
(Unfavorable) %
2010 2009 Variance Change(1)
(In millions)
Company restaurant sales ......................... $815.6 $890.0 $(74.4) (8.4)%
Company restaurant expenses ....................... 699.3 766.5 67.2 8.8%
Company restaurant segment profit .................. $116.3 $123.5 $ (7.2) (5.9)%
Segment profit as % of revenue(1) ................... 14.3% 13.9%
(1) Percentages calculated on actual, not rounded, amounts
As of December 31, 2010, Company restaurant operations were comprised of 309 Applebee’s
company-operated restaurants and 11 IHOP company-operated restaurants. The impact of the IHOP
restaurants on all comparisons of fiscal 2010 with the same period of 2009 was negligible.
Company restaurant sales declined $74.4 million. Applebee’s company restaurant sales declined
$74.1 million, of which $38.0 million was due to the franchising of 83 company-operated restaurants in
the fourth quarter of 2010 and seven restaurants during 2009 and $20.7 million was due to the addition
of a 53rd week of operations in the prior year. A decrease in domestic same-restaurant sales of 1.3%
and the closure of seven restaurants in 2010 were responsible for the rest of the decline. The change in
same-restaurant sales was driven mainly by a decline in guest traffic that was partially offset by a
slightly higher average guest check. The higher average guest check is primarily the result of an
increase of approximately 1.7% in menu pricing and favorable product mix changes. We believe the
decline in comparable guest traffic is reflective of the current adverse economic conditions affecting
customers and impacting the restaurant industry as a whole.
Company restaurant expenses declined $67.2 million. Applebee’s company restaurant expenses
declined $66.4 million due to the franchising of 83 restaurants in the fourth quarter of 2010, the impact
of the 53rd week in 2009 and the closure of seven company operated restaurants. Operating margin for
46