IHOP 2013 Annual Report Download - page 24

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3
PART I
Item 1. Business
DineEquity, Inc., together with its subsidiaries (referred to as the “Company,” “we,” “our” and “us,”), owns, franchises and
operates two restaurant concepts: Applebee's Neighborhood Grill & Bar® (“Applebee's®”), in the bar and grill segment within
the casual dining category of the restaurant industry, and International House of Pancakes® (“IHOP®”), in the family dining
category of the restaurant industry. References herein to Applebee's and IHOP restaurants are to these two restaurant concepts,
whether operated by franchisees, area licensees or by us. As of December 31, 2013, 99% of our 3,631 restaurants across both
brands were franchised. We believe this highly franchised business model requires less capital investment and general and
administrative overhead, generates higher gross profit margins and reduces the volatility of free cash flow performance, as
compared to owning a significant number of company-operated restaurants. We use our 33 core company-operated restaurants
primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models.
We generate revenue from four reporting segments, comprised of:
• Franchise operations - primarily royalties, fees and other income from 1,988 Applebee’s franchised restaurants
and 1,607 IHOP franchised and area licensed restaurants;
• Rental operations - primarily rental income derived from lease or sublease agreements covering 723 IHOP
franchised restaurants and one Applebee’s franchised restaurant;
• Company restaurant operations - retail sales from 23 Applebee’s company-operated restaurants and 13 IHOP
company-operated restaurants; and
• Financing operations - primarily interest income from approximately $120 million of receivables for equipment
leases and franchise fee notes generally associated with IHOP franchised restaurants developed before 2003.
Most of our revenue is derived from domestic operations within these four reporting segments, with approximately 88%
of our total 2013 revenues being generated from our franchise and rental operations. Revenue derived from all foreign country
operations comprised less than 3% of total consolidated revenue for the year ended December 31, 2013. At December 31, 2013,
there were no long-lived assets located in foreign countries. See Note 17, Segment Reporting, of the Notes to the Consolidated
Financial Statements included in this report for further segment information.
This report should be read in conjunction with the cautionary statements under “Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Cautionary Statement Regarding Forward-Looking Statements.”
Our Key Strategies
Our business strategies are based on the following key elements:
• Optimize organization capability;
• Drive profitable organic growth; and
• Reduce costs for both ourselves and our franchisees.
We have a differentiated approach to brand management that centers on the strategic combination of marketing, menu,
operations and restaurant remodel initiatives that we believe creates a unique and relevant connection with our customers.
Additionally, our shared services operating platform allows our senior management to focus on key factors that drive the
business while leveraging the resources and expertise of our scalable, centralized support structure. We believe this closely
integrated approach strengthens brand performance and enables growth.
Our History
The first IHOP restaurant opened in 1958 in Toluca Lake, California. Since that time, the Company and its predecessors
have engaged in the development, franchising and operation of IHOP restaurants. Prior to 2003, new IHOP restaurants were
generally developed by us, and we were involved in all aspects of the construction and financing of the restaurants. We
typically identified and leased or purchased the restaurant sites for new company-developed IHOP restaurants, built and
equipped the restaurants and then franchised them to franchisees. In addition, we typically financed as much as 80% of the
franchise fee for periods ranging from five to eight years and leased the restaurant and equipment to the franchisee over a 25-
year period. We refer to this method of operation as our “Previous IHOP Business Model,” which accounts for most of the
activity in our rental and financing segments.