Pandemic changed ‘not what you want to eat, it’s when and how’: Dine Brands CEO

Dine Brands CEO John Peyton joins Yahoo Finance Live to discuss the restaurant industry and how consumers are dining since the pandemic began.

Video Transcript

[AUDIO LOGO]

DAVE BRIGGS: Shares of Dine Brands Global falling just about 6% today after the parent company of Applebee's and IHOP reported a fourth quarter earnings beat. But revenue and same-store sales missed Wall Street expectations. Let's break down the quarter and what we're seeing from the consumer with Dine Brands CEO John Peyton, and Brian Sozzi is here with us. We've talked a lot about Sozzi. It's nice to-- we've been quoting you--

BRIAN SOZZI: I swear I live. I'm not AI, buddy.

DAVE BRIGGS: John, good to see you, sir.

JOHN PEYTON: Well, in the green room, I heard eight references to Sozzi.

DAVE BRIGGS: Right?

JOHN PEYTON: But you don't see him.

BRIAN SOZZI: I'll talk pancakes--

JOHN PEYTON: There's just references to him now.

DAVE BRIGGS: We're forced now to mention him X amount of times per show.

JOHN PEYTON: It's part of the new contract.

DAVE BRIGGS: What did you learn in the quarter, John?

JOHN PEYTON: What we learned in the quarter is that our guests and Americans dining out are still looking for experiences, Dave. And so we've seen a lot of the reporting about durable goods. People are not spending necessarily on new pillows or curtains or a new sofa. But the psychological COVID hangover about getting out with friends and family, restaurants, bars, hotels, cruise ships are doing really well. And both of our brands and our new one, Fuzzy Taco Shop, which you'll ask me about, I hope--

DAVE BRIGGS: We will.

JOHN PEYTON: --further in--

DAVE BRIGGS: We'll talk tacos.

JOHN PEYTON: --but both those brands, Applebee's and IHOP, are both value-oriented brands and have spent years building trust with their guests there. And so they really-- they performed well, as you could see with eight quarters of consecutive comp sales growth for Applebee's and seven for IHOP.

BRIAN SOZZI: John, one thing I think I've taken away from this earnings season is that middle America and low-income America is hurting. They've really been hurt by inflation. What are you seeing from some of your restaurants, IHOP and Applebee's in middle America? How are these consumers spending?

JOHN PEYTON: And the-- that's our focus, right? That's our customer. 75% of our guests earn less than $75,000 a year. So that is our sweet spot. And what impressed us last year and probably surprised us, right, throughout the year is-- was the durability and the consistency. So our traffic remained fairly consistent throughout the entire year. Both brands, as we said, post positive comp sales of 5.1% or 5.2% for Applebee's and 5.8% for IHOP year over year.

But what we did see is that the guests were managing their average check because they know our menu really well and how to navigate it. So at a time when we were rising-- when our franchisees were raising prices, Brian, they managed to keep the average check steady throughout the year by finding those value-oriented portions of our menu, where you can get two entrees for the price of X and those sort of things.

BRIAN SOZZI: So value seekers seeking out your restaurants. Do you think they're trading down from a more expensive experience, let's just say Buffalo Wild Wings? Do you see a consumer that's trading down to an Applebee's and an IHOP?

JOHN PEYTON: It's hard to get really specific data on that in our industry. But our sense is that we gained some new customers, and we probably had some of our customers dine with us a little bit less during the year. But all in all, when you look at the comp sales, particularly for the fourth quarter, it was-- we were pleased by how steady it was.

DAVE BRIGGS: It was interesting to see the number as consumers spent at restaurants and bars up 7.2% in January, most since March of '21. How much is due to inflation, in particular food inflation at the grocery store driving people to go out?

JOHN PEYTON: It is true, right? The cost of food-- the cost of restaurant prices has risen slower than groceries. I have a personal theory that I don't think that grocery prices are particularly relevant to restaurant prices because if you-- I don't think consumers make a trade-off between a hamburger at a restaurant or a hamburger at home. If they want to eat inexpensively at home, they can have peanut butter and jelly, right, or they can have a can of tuna fish.

So it's really a choice about-- what changed in COVID is, it's not what you want to eat, it's when and how you want eat it, right? And so now people say-- before they say, I want to have a burger, they say, do I want to eat at home? Do I want to eat at a restaurant? Do I want to take out? Do I want to have it delivered? And then when they figure out that, then they say, am I having a burger? Am I having a milkshake? Am I having a pizza? And so we've learned to play in all of those areas because the way in which people make their decisions has changed.

BRIAN SOZZI: IHOP is just not the destination for pancakes, it's also for eggs. And egg inflation has been one of the hottest topics here on Yahoo Finance the past year. How have you managed that? Are you serving omelets with one less egg? How are you dealing with this from a supply chain perspective?

JOHN PEYTON: So in terms of reducing our portion sizes, never, ever.

BRIAN SOZZI: So still the same amount of eggs in an omelet?

JOHN PEYTON: Still a three-egg omelet.

BRIAN SOZZI: OK. Well, how do you pull that off and keep your margins intact?

JOHN PEYTON: All right, so let's go backwards to go forward. So first half of last year, inflation of cost of goods into our restaurants, into franchisees' restaurants, was low 20s for both Applebee's and for IHOP. By the fourth quarter, Applebee's was 12% inflation, IHOP was still 19.5%. So barely declined because of eggs, and also wheat because of the war and pressure on wheat.

When you look at how our franchisees raised prices last year, they raised them 7% or so at Applebee's, 10% at IHOP. So we like what they did strategically and that they took about half the cost of inflation in terms of price. And we thought that was responsible and prudent management of their margins, protecting their margins, but also not pricing themselves out of this value relationship we have with our customers.

DAVE BRIGGS: All right, from IHOP to tacos, and there is a segue there because pancake tacos are not bad. I don't know if you guys have ever had them.

BRIAN SOZZI: Pancake tacos?

DAVE BRIGGS: Oh, yeah.

BRIAN SOZZI: OK.

DAVE BRIGGS: I'm telling you, I'll--

BRIAN SOZZI: I believe you.

BRIAN SOZZI: I got Seana in the background.

JOHN PEYTON: So you may be on to something.

DAVE BRIGGS: You may have to have a collab, as they call it.

JOHN PEYTON: I may have sampled pancake tacos in our test kitchen.

DAVE BRIGGS: See? All right, so Fuzzy's, is it in that Chipotle category, for those unfamiliar? And how significant do you expect it to be driving growth?

JOHN PEYTON: Yeah, so what I love about-- what we all love about Fuzzy's is that it's really not in the Chipotle category. So Fuzzy's is all about the experience. So when you go into a Fuzzy's, it's a place that invites you in and you want to stay.

So for example, you're surrounded by huge large screen TVs, great music, really fun design. Every restaurant is built around a bar with really Instagrammable drinks, margaritas that have beer bottles in them. And unlike some of the competitors, you eat on a plate with utensils. So it's a place where you get to-- the experience of really someplace you want to stay and when you feel welcome to want to stay. So it's a big addition for us.

DAVE BRIGGS: It's fast casual.

JOHN PEYTON: It's fast casual. And it's a great economic model for the franchisees, Dave, because while there's back-of-house staff, you serve yourself, but you're served on real plates--

DAVE BRIGGS: Not one we can walk to, is there?

BRIAN SOZZI: How many of these will you have over the next couple of years?

JOHN PEYTON: Our goal is to have many more than we currently have. So I know up here in New York, you may know the brand well. There's 140 of them. They started in Texas, and they've been growing north from there. We love the brand because we think it's got great potential to go east-- I can't get my directions right on TV-- east, west, and north.

BRIAN SOZZI: You were close.

JOHN PEYTON: There's 125 in the pipeline that'll open in the next couple of years. And a big part of our investment thesis is, when you plug in Fuzzy's to our engine, we can really accelerate their growth. And that was our plan.

DAVE BRIGGS: Is their one within walking distance?

JOHN PEYTON: Of here?

DAVE BRIGGS: Yeah.

JOHN PEYTON: No.

DAVE BRIGGS: Ugh.

BRIAN SOZZI: Look out-- look out Taco Bell.

JOHN PEYTON: But when you're in Dallas or Denver, take a look for it.

DAVE BRIGGS: OK. I'm from Denver. I'll be there soon. John Peyton, Dine Brands CEO, good to have you, sir. Brian Sozzi, always a pleasure.