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DineEquity Inc.’s (DIN - Snapshot Report) second-quarter 2013 adjusted earnings of $1.02 per share beat the Zacks Consensus Estimate of 91 cents by 12.1%. However, the adjusted earnings were down 3.8% year over year.

Lower profit generation from the refranchising along with weaker top line were responsible for such year-over-year decline in earnings.

Inside the Headline Numbers

Revenues in the reported quarter declined 31.1% year over year to $158.1 million, owing to a 36.7% fall in franchise and restaurant revenues and lower traffic at Applebee’s. However, quarterly revenues were in line with the Zacks Consensus Estimate.

DineEquity operates and franchises restaurants under Applebee's Neighborhood Grill & Bar and IHOP brands. Amid a volatile economic condition, Applebee's succeeded in posting positive domestic system-wide comparable sales (comps) of 1.3%, which were also ahead of the year-ago quarter’s comps growth of 0.7%. Comps in the quarter received a boost from higher average guest check offsetting the decline in traffic.

In the second quarter, IHOP’s domestic system-wide comps were up 1.9%, driven by the increase in average guest check as well as traffic. IHOP has succeeded in posting positive comps as well as traffic growth for the first time in the past 11 quarters. It proves that the company’s four-pillar strategy which focuses on menu enhancement, operational improvement, aggressive marketing and better services has started to pay off.

Store Update

At the end of the quarter, DineEquity had 3,605 restaurants under Applebee’s and IHOP brands. DineEquity has opened four Applebee's and 10 IHOP units in the quarter. The company, however, shut down 23 and six restaurants under Applebee's and IHOP brands, respectively.

Share Repurchase

During the second quarter, DineEquity bought back 0.2 million shares worth $14.5 million.

2013 Outlook Retained

DineEquity has retained its outlook for 2013. The company expects  domestic system-wide comparable-store sales at both Applebee’s and IHOP to be in the range of down 1.5% to up 1.5% in 2013.

DineEquity plans to open 40 to 45 franchised restaurants under Applebee's brand as well as 50 to 60 IHOP franchised restaurants by year end, most of which will be located in the domestic market. The company intends to refurbish 70% of its restaurants by the end of 2013.

Our Viewpoint

DineEquity’s year-over-year decline in earnings and revenues in the past three quarters is a matter of concern. The company has remodeled its business to franchise-based in order to reduce the volatility in earnings and increase its cash flow generation. However, the company’s current financial results, especially the drop in earnings, reflect that it has a long way to go.

On a positive note, with the help of its four-pillar approach, this Zacks Rank #3 (Hold) company has succeeded in posting positive comps growth in the second quarter.

Among other restaurateurs, McDonald’s Corp. (MCD - Analyst Report) missed on earnings but reported in-line revenues, while Dunkin' Brands Group, Inc. (DNKN - Snapshot Report) beat earnings but missed out on revenues. Another company, Buffalo Wild Wings Inc. (BWLD - Analyst Report), was ahead of the estimates on both counts.

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