Hello. Welcome to the Q4 Fiscal 2016 DineEquity, Inc. Earnings Conference Call. My name is Jason, and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and please note this conference is being recorded. I will now turn the call over to Ken Diptee. Mr. Diptee, you may begin.
Good morning. Welcome to DineEquity's fourth quarter and fiscal 2016 conference call. I'm joined by Julia Stewart, Chairman and CEO, Richard Dahl, Lead Director, Tom Emrey, CFO, Darren Rebelez, President of IHOP, and Gregg Kalvin, Corporate Controller. Before I turn the call over to Julia, please remember our safe harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be substantially different than those expressed or implied. We caution you to evaluate such forward-looking information in the context of these factors, which are detailed in today's press release and 10-K filing. The forward-looking statements are made as of today and assume no obligation to update or supplement these statements.
We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on DineEquity's website. I will now turn the call over to Julia.
Thank you, Ken. Good morning, everyone. We certainly appreciate you joining us today. We have a slightly different format this quarter. As you know, I recently announced my decision to step down as Chairman and CEO of DineEquity, Inc.. I'm very proud to have led this company and been part of its historic transformation over the last 16 years. We have always been focused on delivering shareholder value. We successfully turned around IHOP early in my tenure, then did it again in 2013. We acquired and subsequently re-franchised Applebee's, and in the process, created a fully franchised DineEquity, Inc.. Additionally, we completed a $1.4 billion securitization refinancing, which enabled a significantly lower fixed interest rate, and thereby allowed for greater financial flexibility. It's an incredible story. It's been an incredible journey.
It's widely known that my first job was as a food server at an IHOP in San Diego. It was then that I first fell in love with this industry. It's an industry where we have the opportunity to make a positive impact on people's lives by providing them a place to gather with family and friends for great food and service. The restaurant industry, which is the second largest employer in the private sector, provides millions of opportunities for a first job and millions more as a career. Those of us that work in hospitality truly enjoy serving others. I've spent my entire career in this great industry, and these last 16 years have been both incredibly challenging and rewarding, and have provided me with experience and accomplishments I will long savor as I move on.
Before I turn the call over to Richard, I'd like to extend my heartfelt gratitude to my senior leadership team, all of our talented team members, our valued vendor partners, and committed franchisees for your tireless hard work as we created one of the world's largest full-service restaurant companies with two iconic brands, both number one in their respective categories for the last nine years. Looking ahead, I'm confident in the well-researched and detailed plan we've created for Applebee's, which, coupled with the many strategic initiatives at IHOP, will continue to best position DineEquity, Inc. for a bright and successful future. I'm looking forward to seeing the DineEquity, Inc. team and its franchisees take both brands to new heights in the years to come. I want to extend my sincere thanks to the many investors and analysts on this call.
It has been a privilege and my pleasure to have worked with all of you. I have no doubt our paths will cross again soon. With that, I'll turn the call over to Richard.
Thank you, Julia. Good morning, everyone. On behalf of our entire board of directors and senior management, I would like to take a moment to thank Julia for her 16 years of valued and committed service to DineEquity, our franchisees, and our shareholders. Julia has been a visionary and a strong leader who's made numerous and lasting contributions to the company. She led the successful turnaround of IHOP earlier in her tenure and again in 2013. She spearheaded the acquisition and refinancing of Applebee's company operated restaurants, driving the transition to a fully franchised business model. The board wishes her continued success in her future endeavors. Thanks again, Julia. As you may have seen this morning, we issued a release announcing the resignation of Tom Emrey as our CFO effective March 15, 2017.
Tom has been a valued member of the DineEquity executive team for more than 5 years and recently shared with me his desire to return to the consumer product roots as a CFO of Munchkin, a privately held global infant products brand. I want to personally thank Tom for the unconditional commitment and dedication through the years. He has built a tremendous team, and I am confident in their abilities to continue to do great work. While Tom is here today to answer questions, Gregg Kalvin, our longtime Controller, will review our financial highlights a little later. Gregg will assume the role of interim CFO on Tom's departure. As for me, I'm eager to assume the role of interim CEO. In addition, I will serve as the interim President of the Applebee's group effective today. The Board is effectively working to identify candidates to permanently assume both roles.
I'm optimistic about the road ahead for DineEquity, IHOP, Applebee's, the entire company, and the experience I bring to the company. Having served on DineEquity's Board of Directors for 13 years and as Lead Director since 2010, I've worked closely with the management team. I've developed a deep understanding of the company, its iconic brands, its stakeholders, and our committed franchisees. Additionally, I have over 35 years of experience in senior leadership roles with both public and private companies. During my tenure with Dole Food Company, I held the positions of President, Chief Operating Officer, and Chief Financial Officer. As we focus on the road ahead, we are committed to the long-term success of both brands and continuing to grow our international footprint. Of course, the immediate focus is the stabilization of the Applebee's business, both commercially and financially. We're already moving forward with great urgency.
The guidance we provided in our press release today reflects the meaningful investments we're making to accomplish this turnaround. While the revitalization of the brand will not occur overnight, we believe we have the right strategy in place to restore Applebee's growth. To that end, we have been working closely with our Applebee's franchisees and a world-class management consulting firm to develop a deeper understanding of what has driven recent sales trends. More importantly, we've worked with the same firm to validate and build on brand initiatives and identify additional creative strategies that we will execute over the course of 2017. We will certainly provide you with updates as our progress occurs during the year. I'd like to provide a couple of big-picture comments here before we go down into IHOP and Applebee's and the financials.
Certainly, in 2016, our franchise business model continued to generate strong adjusted free cash flow, enabling us to balance ongoing investments in our brands with returning cash to shareholders. Looking to that macroeconomic environment, clearly, there's been a decline in foot traffic at brick-and-mortar retailers during this last holiday season due to more customers shopping online. This certainly had a negative impact on traffic to our restaurants and third-party retail sales of our gift cards at the end of 2016. Additional factors that probably, possibly influenced consumer behavior include the trends in dining at home and takeout of prepared foods from grocery stores, has received a good deal of traction lately, as well as the weaker traffic trends experienced by retailers during the holiday season, as earlier mentioned. That said, these are challenging times for the restaurant space, and we will continue to invest in our brands to improve performance.
We are fortunate to have two strong brands serving millions of guests each year. Darren will provide details on the initiatives being implemented at IHOP, and then I will have a more fulsome discussion of Applebee's. I'll turn this over to Darren, our President of the IHOP brand and stores. Darren, you will.
Thank you, Richard, and good morning. IHOP's comps for fiscal 2016 were essentially flat compared to the highest full-year sales increase in over a decade. However, on a two-year basis, IHOP's comp sales were up a strong 4.3%. IHOP is not immune to the challenges facing the entire industry. Again, the impact of a steeper decline in family dining traffic in 2016 relative to the prior year was reflected in our performance, particularly in the fourth quarter. Compounding the industry headwinds, we made a shift in our media buying strategy in the fourth quarter that resulted in diluting the reach of our media, which adversely impacted our traffic. That change has since been corrected. IHOP's advertising was adjusted, with new TV spots emphasizing quality and a focus on our popular All You Can Eat Pancakes promotion for maximum frequency to drive traffic.
While we're clearly not content with the brand's recent sales, there are several highlights in 2016 worth noting. Development of an additional 17 net new restaurants globally, representing a 52% increase over 2015. We accelerated our non-traditional development, adding seven new sites while building a dedicated team and a more robust pipeline. We launched the most comprehensive remodel program in the brand's 58-year history, which enhances the dining experience and reflects the ongoing innovation at IHOP. Through the hard work and dedication of so many IHOP franchisees this past year, I'm very pleased to report that we've achieved our target of 300 remodeled restaurants under the Rise and Shine remodel program. We completed the system-wide launch of an advanced web-based training platform called DinePlate, which provides more consistent training across our entire system.
On National Pancake Day, together with our franchisees, we raised a record $4 million to support the Children's Miracle Network, Leukemia & Lymphoma Society, and the Shriners. We launched a new strategic advertising campaign that highlights the special emotional connection that guests experience in an IHOP while showcasing our unique and craveable products, our Double-Dipped French Toast and Criss-Croissants. Looking ahead to 2017. Testing is a vital part of our go-to-market strategy at IHOP. We're concentrating on strategic growth initiatives designed to continually drive the business forward and enhance the guest experience. Our overarching goal is to create additional opportunities to affect sales and traffic. We continue to remain focused on enhancing the guest experience on a number of fronts in 2017.
First, in collaboration with our franchisees, we'll continue to implement our Rise and Shine remodel program with the goal of completing another 300 remodels this year. We'll also leverage the DinePlate training platform to further enhance the guest experience. Enhancing the guest experience is not only limited to the four walls of the restaurant. We believe that expanding our off-premise business will not only make IHOP more accessible to our guests but create an additional sales channel. We're currently beta testing our Meals to Go program, which includes proprietary packaging technology and online ordering. This packaging, in development for over one year, is specifically engineered to protect the integrity of our unique breakfast foods and to ensure a quality experience for our guests. Additionally, we're conducting tests of a new beverage platform and menu re-imagination across all day parts, leveraging our expertise in breakfast foods, ingredients, and cooking techniques.
We'll provide an update on all these initiatives later this year. With that, I'll turn the call back over to Richard for a discussion regarding Applebee's. Richard?
Thanks, Darren. I'll have a little deeper discussion now of Applebee's. We believe the reason for Applebee's underperforming, even given the weak industry results, involves every aspect of our business, from the value perception, marketing, food differentiation, and operations execution. Each of these factors must be and will be addressed. Clearly, what we implemented in 2015 and 2016 did not resonate with our guests, and combined with industry softness, resulted in further sales declines. The Hand-Cut Wood Fired Grill platform did not have the desired effect and was off-target with value-focused trends in the industry. Additionally, our value-oriented promotional campaigns launched during the third and fourth quarters of 2016 did not have the desired impact and exacerbated the sales decline in the fourth quarter.
Obviously, we are not immune from the pressures faced by the category during the fourth quarter, particularly in December, which was the worst for casual dining sales and traffic during 2016. We are working hard to make sure that Applebee's is the first choice of our guests. As referred in our press release, we're making significant investments in our plan to stabilize Applebee's. These investments are primarily in the areas of consumer-focused demand and ensuring franchisee financial health. Regarding consumer-focused demand, we focused on multiple streams of work and building on the strengths of the brand on all fronts to affect positive change. This encompasses a deep dive into our approach to culinary, testing, and marketing. I'll provide a little color on each. First, culinary. Culinary innovation is, of course, an important part of our plan.
We're making investments to improve food quality, as well as simplifying back-of-the-house efforts to improve restaurant operation and execution. As America's number one casual dining restaurant for the last nine consecutive years, our goal is to continually refine our food to ensure that it's delicious, well-proportioned, high quality, and a great value. Applebee's has clear, very clear, unaided brand awareness for being an affordable destination with a very strong position in both the happy hour and late night that we can build around in addition to the other day parts. Second, we must use a robust testing methodology to better meet the ever-changing needs of our guests. To this end, there are several strategic growth initiatives and IT platform that we are testing and focusing on this year. We are addressing our testing protocol to better predict and analyze each opportunity going forward.
This year, our focus is on taking a back-to-basics approach. While we won't disclose specific details for competitive reasons, of course, our strategy encompasses accelerating the rollout of off-premise channels to add to the convenience of accessing Applebee's customers, growing the bar and beverage business, and enabling and supporting our initiatives with appropriate consumer-facing technology. Third, we're looking at our brand platform and brand positioning to support a more robust marketing strategy. This also includes the selection of a new advertising agency. Our advertising focus will highlight our craveable new menu items planned for the balance of 2017 and a connective atmosphere to enjoy them at Applebee's. We will also place a greater emphasis on value. Remember, value is not just about the price. It's what our guests pay for and receive across all dimensions of our guest experience.
We're also working with our digital and media partners to significantly improve our outreach to segmented customers and to build personalized engagement opportunity for our guests through email, digital, and social media. Again, we will provide updates on these initiatives during the year. Turning to our franchisee financial health, our highest priority is the long-term success of all of our franchisees. The sales decline in the fourth quarter has put stress on several Applebee's franchisees. As a result, we have implemented a detailed system-wide franchisee and restaurant-level review to look for opportunities to improve operating efficiencies, franchise profitability, and to better understand how we can help them. In limited cases where assistance may be necessary, we stand ready to provide support to our franchisees. Assistance can take several forms depending on the situation.
We believe clearly that restaurant closures are an important tool to preserving the financial health of the system. I'd like to highlight that not all franchisees are in the same situation, and we evaluate each individually to maintain a strong system. While we expect that 2017 will have some challenges in store for us, we're taking the necessary steps to address them and make our brand stronger for the long term. I'd like to turn this over to Gregg Kalvin to touch on some financial highlights. I'll return with a few comments before we open up for Q&A.
Thank you, Richard. Good morning, everyone. I'll briefly review our financial highlights and then discuss the state of our Applebee's franchisees before wrapping up with an overview of our financial guidance for fiscal 2017. Let's start with the income statement. For the fourth quarter of 2016, adjusted earnings per share was $1.37, compared to $1.59 for the same period of 2015, mainly driven by lower gross profit. The decline in gross profit was largely driven by a 7.2% decline in Applebee's comps and the fourth quarter of 2015 having 14 weeks due to the 53rd calendar week, compared to 13 weeks in the fourth quarter of 2016. For fiscal 2016, adjusted earnings per share was $6.01 compared to $6.19 in 2015.
The decline was primarily due to lower gross profit, driven by the impact of the 53rd calendar week in fiscal 2015, which resulted in an incremental $9.4 million in gross profit for that year, and a 5% decline in Applebee's comps for 2016. The decline in gross profit was partially offset by lower income tax expense and favorability in G&A. Now turning to G&A. G&A for the fourth quarter of 2016 improved by $8 million to approximately $37 million, compared to $45 million for the same period last year. The improvement was primarily due to lower incentive compensation due to soft performance at both brands in 2016, and lower travel and meeting costs due to the timing of our franchisee meetings that were held in the fourth quarter of 2015 compared to the third quarter of 2016.
G&A for 2016 was nearly $149 million, compared to roughly $155 million for 2015. The improvement was largely due to lower incentive compensation costs. In 2016, there were some non-recurring costs related to our restaurant support center consolidation. Roughly $3.3 million was included in G&A, and approximately $2.9 million was reported in our line item on our financial statements closure and impairment charges. These consolidation costs were not included in the calculation of adjusted earnings per share. Regarding our tax rate, the effective tax rate for 2016 was 36% compared to 37.8% the prior year, primarily due to benefits of lower state tax rates applied to our deferred tax balances as a result of our restaurant support center consolidation move from Kansas City to Glendale. Now let's turn briefly to our cash flow statement.
Cash flows from operating activities were approximately $118 million for 2016, compared to $136 million for the prior year. The overall decrease in the cash from operations was primarily due to two factors. One, which we outlined in our press release earlier today, which you can see. There were net changes in working capital, which used cash of approximately $12 million in 2016, compared to providing cash of $4 million in 2015. Some of the reasons for that, the unfavorable variance in working capital between the two years was principally due to less cash collected from gift card receivables, partially as a result of the 53rd week in 2015, in which we collected $12 million of gift card money on the last day of the fiscal year, as we discussed on our earnings call for the fourth quarter of 2015.
The decline in cash from operations and a decrease in receipts from notes and equipment contracts receivable were partially offset by lower than expected capital expenditures. This resulted in adjusted free cash flow approximately $123 million for 2016, compared to approximately $142 million for 2015. Regarding the state of our Applebee's franchisees, as Richard mentioned, through ongoing internal and external analysis, we continue to closely partner with and monitor the financial state of our franchisees. Understandably, the pressures felt across the casual dining category for over a year have adversely impacted some of our Applebee's franchisees. This trend, which accelerated in the fourth quarter of 2016 for Applebee's, is expected to continue at least through the first half of 2017 and is built into our financial performance guidance. As Richard also mentioned earlier, our 2017 plan includes expectations for the closure of some Applebee's restaurants.
We currently anticipate closing 40 to 60 restaurants, the midpoint which is slightly above 2016 levels, which we closed 46. Our 2017 guidance also reflects Applebee's new restaurant openings to range between 20 and 30. The majority of which are expected to be international openings. As we discussed last quarter, Applebee's domestic development has slowed due to industry headwinds and the subsequent impact on comparable sales. We remain committed to our Applebee's revitalization plans and investing for the brand's long-term growth. Finally, I'll discuss our performance guidance for 2017. I'd like to provide a few highlights, but please see our press release issued today for complete details. We expect comp sales to range between -4% and -8% for Applebee's. Our guidance reflects the continued challenge facing the industry, as well as the time we believe it will take to implement sales and traffic-driving initiatives to see meaningful results.
At IHOP, we expect comp sales to be between 0 and +3%. We expect interest expense to be approximately $62 million, of which roughly $3 million is projected to be non-cash. G&A is expected to range between approximately $170 million and $177 million, including non-cash stock-based compensation expense and depreciation of $22 million. The anticipated increase in G&A compared to fiscal 2016 is primarily due to expectations for higher personnel-related and incentive compensation costs, as well as investments in Applebee's stabilization initiatives. We expect these initiatives to total approximately $10 million in 2017 and anticipate that a substantial amount of these costs will not recur in 2018. Additionally, G&A is inclusive of approximately $9 million of non-recurring cash severance and equity compensation charges in the first quarter of 2017, which will be added back in our calculation of adjusted earnings per share.
Finally, G&A expenses for 2017 will generally be ratable on a quarterly basis, except for the approximate $9 million cash severance and equity compensation charges, which we expect to occur in Q1, and the $10 million, which I previously talked about, for Applebee's stabilization initiatives, which we believe will occur ratably over the first six months of 2017. Turning to adjusted free cash flow, we expect a range of approximately $96 million to $106 million. The anticipated decline compared to 2016 is primarily due to expectations for lower net income as a result of higher G&A and our projections for comp sales. The specific higher G&A components are outlined in our press release. Our income tax rate is expected to be roughly 38% for 2017. Lastly, capital expenditures are expected to be approximately $12 million. The projected increase compared to 2016 is primarily due to IT-related projects.
To close, we remain focused and committed to the long-term health of our brands and our franchisees. We continue to invest in growth initiatives, which we believe will drive improved performance and shareholder value. With that, I'll turn the call back to Richard for his closing comments.
Okay. Thank you, Gregg. To recap, it's important to remember that we have two iconic brands that are number one in their respective categories based on domestic system-wide same restaurant sales. We're working proactively with our Applebee's franchisees to address the impact of the still challenging restaurant environment. At IHOP, we've accomplished a great deal in 2016, and we're taking steps to promote sales and traffic momentum. Our highly franchised model continues to generate strong adjusted free cash flow, enabling investments in growth initiatives as well as returning cash to shareholders. We have a plan in place to drive the business forward and change the trajectory of both plans. Again, I am eager to lead DineEquity, Inc. and look forward to meeting all of you to further discuss the future of the company and its prospects.
Before I open it up for questions, I would like to address a couple of tax questions that have come to us earlier, and I think addressing them right up front makes sense. First is our leverage. There are a number of important covenants in our debt securitization. One, the most important one, is our debt service coverage ratio or DSCR. A default event would occur if the DSCR is below 1.1 time. At the end of fiscal 2016, our DSCR was 5.1 times, which provides us with more than sufficient cushion. Please refer to our 10-K for any further discussions of the various covenants and so on. Two is our free cash flow generation. The benefit of our nearly 100% franchise model is that DineEquity, Inc.'s free cash flow variability is well-insulated against changes in same-restaurant sales growth.
At the midpoint of our guidance range, we still expect to generate approximately $101 million in free cash flow. Finally, our cumulative dividend of approximately $67 million paid in 2016 can continue to be supported with our current and guided free cash flow. I'd like to now, operator, open it up for the Q&A.
Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touch-tone phone. If you wish to remove yourself from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touch-tone phone. Our first question comes from Alexander Marty from Raymond James.
Good morning, guys. Just a few questions on some of the franchisees. The first one was, how often do you guys receive the financials from your franchisees?
Marty, this is Ken. On the IHOP side, we receive that information on a quarterly basis, on the Applebee's side, it's annually.
Okay, perfect. That's really helpful. If you could, can you disclose which percentage of the franchise units have around a negative store-level cash flow post royalty?
No. The franchisee financial information is private to them, and we wouldn't give it out. We'll pass on that question, but it's well in hand.
Sure. Completely understand. One more, if I may. I've received this question from some investors about G&A allocation between IHOP and Applebee's. Can you possibly help with this, and specifically in regards to 2017?
Well, this is Gregg. We don't allocate for public reporting purposes between the two brands. Our G&A, which includes a robust shared service model, supports both brands and the corporate entity of Dine. We don't disclose that.
Understood. Thanks, everyone.
Thank you.
Thank you. Our next question comes from Michael Gallo from C.L. King.
Hi, good morning.
Morning.
My question is for Richard. Richard, from a high level looking in, I was wondering if you can speak to what you see as the real problems, sort of the top few that you think you can address at Applebee's. I was wondering if you can speak to more specificity on the $10 million of investment and how that's really going to be deployed. Also, obviously, given the projection that same-store sales are going to be down mid to high single digits again in 2017, I was wondering if you could speak to number of stores up for renewal over the next few years. Thanks.
Okay. There's quite a list. Stop me or remind me if I miss one of them. You know what? The big picture on the Applebee's side truly is one, is stepping into this, that we have certainly tried very hard to be innovative, imaginative in bringing new products, food, services to the Applebee's brand. The reality is they just didn't resonate with the customer as we had hoped they would. We've got to go, and we've gone back to the drawing board, as I said in my prepared remarks, back to a lot of the basics to reestablish our rapport with those customers. We need to increase their frequency. Maybe we need to win some back.
The real key was the efforts we put forth, which were substantial, in Hand-Cut Wood Fired Grill and in other innovative techniques to please our customers, just didn't resonate with that customer base. It is back to the drawing board, which we've done. A lot of the $10 million investment we're making is in the use of outside services to validate what we think went wrong. It's always good for us to have an independent look at this. We can certainly convince ourselves, we have retained some top talent to reassess that, as well as then chart a better course as to how we test products and how they'll be implemented, what our marketing strategies can be, sharper focus on targeting the customer that is natural to the Applebee's brand, and so on. That's a real key for us.
A lot of that $10 million is in the outside services, as well as for evaluation and assistance of franchisees who have been hurt by the fact that the sales volume has indeed declined. We've hired a firm to assist us in the lookout of some of the financial difficulties with those franchisees. I'm sorry, the third one?
The third one was just on what the renewals. My recollection is there's a big bump starting in 2020, when do the number of units where renewals come up, and obviously, given your projection that same-store sales are going to be down mid to high single digits again this year, that probably will put some more strain on the franchising system.
This is Gregg. I think as we go through this process, even this year and last year, on this analysis of what the Applebee's franchisees, those type of things, whenever they're up for renewal, will be considered now also, because if stores are profitable, as we've said, it's likely renewals would be more favorable to happen. There are contractual commitments that we've outlined that have been filed publicly as to expiration dates of franchise agreements and development agreements and so forth. That we consider as we go through this analysis, as far as analyzing each stores that we would consider. Remember, last year, we closed 46 stores in the Applebee's brand, and this year we're projecting at a midpoint to close another 50. That's based on detailed analysis, specifically on profitability, among other factors.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Chris O'Cull from KeyBanc Capital Markets.
Thanks. Good morning, guys. Richard, I believe the company has been searching for a concept president for Applebee's for some time now. Is the Board planning to hire, or would they consider hiring a brand president before hiring the CEO of DineEquity, Inc.?
Good question. There has been an ongoing search for an Applebee's president, as you say, and we're very close to having an individual in place for the Applebee's presidency. It will be in place prior to a CEO being retained, if everything works out. There's always the issue of a chicken and egg, which we'll hire first. Candidly, if we'd already had an Applebee's president, a new CEO would be coming in, and there would be two brand presidents in existence. The urgency, truly, of having an Applebee's president overrides the necessity of the CEO search being placed ahead of that.
Can you remind me what positions are open within the Applebee's concept or with their brand? I can't remember if the CMO position, or are there other positions that new president is going to need to fill when they come on board?
One of the key ones that is being filled right now, which is not truly a position, it's a new ad agency, and that is scheduled for selection here very shortly. Again, very acute need for a new ad agency and so on. That is open. The CMO position, there is a strong candidate that's there now, and clearly, the Applebee's president has some flexibility as to roles, but we don't have any significant numbers of open positions to fulfill at Applebee's.
Okay, thanks. I believe many of the franchisees financed their purchases of restaurants a few years back, either from the company or from franchisees through leasing obligations. Is there any concern that these leases could make it difficult for Applebee's, or the system to close restaurants that need to be closed?
Fair question, that is something that has to be looked at on a case-by-case basis. I think the economics surrounding that are certainly a bit different than if those leases did not exist. Yeah, that will be part and parcel of the look-see, you bet.
Okay. Gregg, just my last question. You mentioned that you collect financial information from Applebee's franchisees on an annual basis, I know the company is also the guarantee of some lease obligations. Do you collect that information more often from those franchise groups? If so, can you give us any color as to the financial health of some of the franchisees?
Well, we touched on our comments earlier about the financial health, Richard did. As far as the leasing obligations, we have had those on each re-franchising deal that we've done since the acquisition. We've inherited certain financial obligations on the leases. To date, we frankly never have paid out on any of those, because there are certain backstops just in back of those financial obligations before we get to that. We've successfully, as far as closures goes, have not had that be an issue. With that said, as Richard said, we look at each situation differently, and we would consider how we work out the lease if we should close a store, for example, including the projected stores that we have targeted for this year.
Might add to Gregg's comment. Clearly on the IHOP side of the business, the robustness of the financial review of the IHOP franchisees has always been stronger. They're a larger group. There's anywhere from one store to 100 stores. It's a much different group of people versus the Applebee's franchisees, who are a smaller group, much more financially sophisticated group. Historically, the amount of financial review at Applebee's was less than IHOP. As I indicated in my remarks, though, this year, we have embarked on a much more robust review of the franchisees at Applebee's, as well as the store-by-store analysis to further assist them. That will probably be an ongoing issue. It's a change in the approach on the Applebee's side.
Chris, this is Ken. Just to add to that, with regard to closures, there's several criteria to look at in addition to operating results. It's not just financial.
Okay. Great. Thanks, guys.
Thank you.
Thank you. Next, we have Stephen Anderson from Maxim Group.
I have a couple of questions on the comp guidance you're providing for 2017. I don't know if you can speak at all about the quarterly comp guidance. I'm assuming both for Applebee's and for IHOP, are you expecting maybe the weaker comps to occur early in 2017? To follow up on IHOP as well, just so I wanted to see what your basis is for an acceleration in comp, say, to about the 2%-3% range, and how you think you'll get there.
This is Darren. Yeah, on the comps for 2017, We said we were guiding between 0% and 3%, not 2% and 3%.
Okay, for the full year. Yes.
Yeah, for the full year. We don't typically forecast that on a quarter-to-quarter basis. We're expecting to gain that acceleration through our new marketing platform that I mentioned earlier, as well as the strategic initiatives that we'll be implementing throughout the year.
Okay. I'm sorry to interrupt.
Okay. Just wanted to say that regarding the first quarter, that's obviously considered in the full year guidance, and we don't give inter-quarter guidance. We've looked at the first two months, obviously, and built that into what we've disclosed in the press release today.
Okay. With regard to your comment earlier about value not but just being a price. Now I've seen that some of your peers have done some very price-targeted promotions, usually around the $10 level. I think I've even seen at Applebee's, having a $9.99 lunch promotion. I know you've said the value not being a price is a chief construct, do you think that perhaps having that definite price point may be something your customers will be attracted to? If that's something that may be considered as part of an overall value strategy?
Good point. Price is always going to be a very important factor in determining the consumer's value proposition. I think Applebee's has, rightfully so, always attempted and has succeeded in creating value out of the atmosphere, the location, the convenience, the service, the operational expertise and so on. Price is always a leading indicator, as they say. Yeah, price is still going to have to be a key feature here.
Okay. Thank you.
Thank you. Our next question comes from John Ivankoe from JPMorgan.
Yes. Hi, thank you. This is Michael on for John. I appreciate the conversation around leverage and covenants. I was wondering if you expect to pay any principal in 2017 and 2018, given some of the amortization covenants you have on your debt security.
This is Gregg. Not currently, no. We are in compliance with our covenants below the level that we would pay out, the 1% that I think you're referring to, of our debt. We don't anticipate that right now.
Great. Thank you. Just a follow, just another question, a housekeeping one. In your guidance for cash flow from operations, what are you assuming for deferred tax cash outflows this year?
Similar to 2015 and 2016, which were consistent at about $15 million. It's comprised of about three different items, that'll obviously move over to the current side and get paid out.
Yeah. 2014 was sort of an anomaly because there was recognition of gift card income due to cards that were not redeemed within one year.
Thank you.
Thank you. We have no further questions. I will now turn the call back to Richard Dahl for closing remarks.
Well, thank you again for joining us on the call today. We're scheduled to report the results of the first quarter on May 3rd, certainly, if you have any questions in the interim, please feel free to contact Gregg, Ken, or myself. Thank you all for your support over the years.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.