DineEquity Inc. (
DIN
)
reported third quarter 2012 adjusted earnings of $1.03 per share,
substantially exceeding the Zacks Consensus Estimate of 93 cents.
However, the adjusted earnings missed the prior-year earnings by
a penny. The decrease was mainly attributable to an expected dip
in profit resulting from the refranchising of Applebee's
company-operated restaurants and lower cash interest expense.
On a reported basis, the company earned $3.14 per share compared
to 85 cents in the year-ago quarter.
Inside the Headline Numbers
Revenues in the reported quarter dipped 18.2% year over year to
$216.3 million, but surpassed the Zacks Consensus Estimate of
$209.0 million.
DineEquity operates under Applebee's Neighborhood Grill & Bar
and IHOP brands. Applebee's domestic system-wide comparable-store
sales improved 2.0% during the quarter, with a surge in
franchised same-restaurant sales of 2.2% and company-operated
comparable restaurant sales of 0.5%. Total comparable-store sales
improved on year-over-year basis driven by uptick in average
guest check, partially offset by lighter traffic.
The domestic system-wide same-store sales of IHOP dipped 2.0%
during the quarter due to lower traffic, partially offset by
marginal improvement in average guest check.
Restaurant operating margin at Applebee's company-operated
restaurants jumped 130 basis points (bps) to 15.5% during the
quarter. The surge was attributable to refranchised lower margin
restaurants and termination of depreciation on restaurants
apprehended for sale, partially offset by higher commodity and
labor costs.
Store Update
During the third quarter, DineEquity opened 5 and closed 7
Applebee's franchised restaurants. The company also opened 12
IHOP franchised restaurants and shut down 4 franchised units. At
the end of the quarter, DineEquity had 2,016 Applebee's and 1,565
IHOP restaurants.
The company has been focusing on the franchise business model
since 2011. In this connection, DineEquity has now achieved the
milestone of Applebee's refranchising program. Applebee's company
operated units are now 99% franchised, which can be considered to
be fully franchised. DineEquity currently has retained 23
Applebee's company-operated restaurants for test market purposes.
Liquidity
DineEquity ended the reported quarter with cash and cash
equivalents of $71.8 million and shareholders' equity of $283.1
million.
The company is in a deleveraging mode. It has reduced term loan
balances by $175.2 million, retired $3.6 million senior notes and
$76.6 million of financing and capital lease obligations for the
first nine months of the year.
2012 Outlook
DineEquity reiterated its system-wide sales, unit openings and
capital expenditure guidance for full year 2012. The company
continues to expect Applebee's domestic system-wide
comparable-store sales in the range of 0.5% to 2.5% and domestic
system-wide same-store sales in the range of (1.5%) to 1.5% for
IHOP.
Applebee's franchisees plan to open 30 to 40 restaurants by
year-end, half of which are expected in the domestic market. IHOP
franchisees expect to open 45 to 55 restaurants, mostly in the
domestic market. DineEquity reaffirmed its capital expenditure
guidance in the range of $18 million to $20 million.
The company toned down its expectation for cash from operations
to the range of $43-$55 million (earlier $110-$122 million) and
free cash flow in the range of $36-$50 million (earlier $103-$117
million).
Our Viewpoint
We expect the estimates to go up in the coming days as the
company reported better-than-expected results. Applebee's is
poised for long-term success, based on marketing, menu innovation
and operational improvements. Moreover, with the achievement of
Applebee's transition to a fully-franchised restaurant system,
the company is likely to reduce the volatility of cash flow going
forward. However, comps at IHOP brand continue to decline and the
company still has a long way to go.
DineEquity currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. We are also maintaining our
long-term Neutral recommendation on the stock.
One of the company's peers,
Brinker International Inc. (
EAT
)
, recently reported first-quarter 2013 adjusted earnings of 37
cents per share, lagging the Zacks Consensus Estimate by a
penny.
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