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DineEquity a Dime Ahead - Analyst Blog

Posted
5/7/2012 11:00:00 AM
By: Zacks.com
Referenced Stocks:DIN;TXRH

DineEquity Inc. ( DIN ) reported first quarter 2012 adjusted earnings of $1.36 per share, surpassing the Zacks Consensus Estimate by 10 cents, but lagging the prior-year quarter earnings by 6 cents.

Revenues in the reported quarter plunged 18.2% year over year to $245.6 million.

Inside the Headline Numbers

DineEquity operates under Applebee's Neighborhood Grill & Bar and IHOP brands. Applebee's domestic system-wide comparable store sales scaled up 1.2% during the quarter, with franchise same-restaurant sales up 1.0% and company-operated comparable restaurant sales rising 3.9%. The domestic system-wide comparable store sales improved sequentially, but fell on year-over-year basis. The upside in domestic system-wide comps was driven by higher average guest check, partially offset by a decline in traffic.

The domestic system-wide same-store sales at IHOP dipped 0.5% during the quarter due to lower traffic, partially offset by rise in average guest check.

Restaurant operating margin at Applebee's company-operated restaurants expanded 250 basis points (bps) to 17.8% during the quarter, attributable to a decline in labor expense and depreciation, refranchising of lower margin restaurants and higher average guest check, partially offset by food cost pressure.

Store Update

During the first quarter, DineEquity opened 6 and closed 4 Applebee's franchised restaurants. The company also opened 10 IHOP franchised restaurants and shut down 5 franchised unit as well as one area licensed restaurant. At the end of the quarter, DineEquity had 2,021 Applebee's and 1554 IHOP restaurants.

In the first quarter, the company succeeded in transitioning more than 95% of its units into franchises, by refranchising and selling 17 company-operated Applebee's restaurants located in six-state markets around Tennessee.

The company continues to focus on the franchise business model as it is less capital intensive and reduces volatility of cash flow. DineEquity also expects to use the sale proceeds for reducing its debt burden.

Financial Position

DineEquity ended the reported quarter with cash and cash equivalents of $48.7 million and total shareholders' equity of $195.7 million.

The company is in a deleveraging mode. In the first quarter, the company reduced total debt burden by $85.9 million by using free cash flow and proceeds of refranchise and sale of 17 units.

Outlook

The largest full-service restaurant company in the world reaffirmed its outlook for 2012. The company continues to expect domestic system-wide comparable store sales in the range of 0.5% to 2.5% for Applebee's and in the range of negative 1.5% to positive 1.5% for IOHP.

Applebee's franchisees plan to open 30 to 40 restaurants by year-end 2012, majority of which are expected to come up in the US. IHOP franchisees expect to open 45 to 55 restaurants, mostly in the domestic market.

Our Take

We expect the estimates to go up in the coming quarter as the company reported better-than-expected results and Applebee's is poised for long-term success based on marketing initiatives, menu innovation, technology improvement, operational improvements and remodel program. Moreover with more than 95% of restaurants franchised, DineEquity remains on track to achieve its long-term goal. Besides, the company continues to focus on innovative menu pipeline for 2012 to drive traffic. Additionally, domestic systemwide same-restaurant sales of IHOP has improved sequentially for three quarters, but still comps remain in the red and the company has a long way to go for reporting profits.

DineEquity, which competes with Texas Roadhouse Inc ( TXRH ), currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock.


 
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