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High Operational Costs to Hurt Dine Brands' (DIN) Q2 Earnings

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Dine Brands Global, Inc. (DIN - Free Report) is scheduled to release second-quarter 2018 numbers on Aug 1, before the market opens.

The company’s initiatives to improve guest satisfaction, via the revamping of restaurants and the expansion of off-premise business — including online ordering and delivery, are expected to reflect in second-quarter revenues. However, an increase in expenses related to sales initiatives, along with the prevalence of high labor costs in the restaurant operating environment, are likely to have dented earnings in the to-be-reported quarter.

Nevertheless, the company has also developed top-tier consumer insights and analytics to understand guest preference and enhance the status of its brand. Subsequently, shares of the company have climbed 74.5% in the past year, outperforming the industry’s increase of 4.9%.


Let’s take a look at how the company’s top and bottom line will shape up in the soon-to-be-reported quarter.

Brand Transition Initiatives to Aid Revenues

Starting from fourth-quarter 2017, Dine Brands mentioned that it has shifted its corporate resources directly to its two brands, resulting in greater autonomy and accountability of the company. To accelerate sustainable growth, the company is focusing on key areas across the organization, including brand leadership, culinary, operations and marketing.

To expand the base business, the company invested in technology and growth platforms such as to-go offering for developing incremental revenue channels at both IHOP and Applebee's. In fact, these initiatives have reflected in first-quarter 2018 comps performance. In the first quarter, Applebee's domestic system-wide comps increased 3.3%. IHOP’s domestic system-wide comps also inched up 1%.

We believe the positive trend in comps to continues as the Zacks Consensus Estimate pegs comps growth of 3% and 1.5% for Applebee’s and IHOP, respectively. Also, the consensus estimate for the company’s second-quarter sales is pegged at $186.2 million, reflecting a 20% increase from the prior-year quarter.

Costs to Affect Earnings

Alongside high labor costs associated with restaurant operations, Dine Brands has also been facing increased expenses related to sales initiatives, which might dent the to-be-reported quarter’s profits. Also, incremental investments in marketing programs and promotional activity to combat competition are expected to weigh on its margins.

As a result, gross profit in the first quarter declined 11.4% year over year and the downside is likely to have continued in the second quarter as well, hurting earnings in turn. Subsequently, the consensus estimate for second-quarter earnings of 94 cents reflects a year-over-year decline of 27.7%.

Our Quantitative Model Does Not Predict a Beat

Dine Brands does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Earnings ESP: The company has an Earnings ESP of -3.19%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Dine Brands currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

DineEquity, Inc Price and EPS Surprise

Stocks to Consider

Here are some companies in the restaurant space, which, per our model, have the right combination of elements to deliver an earnings beat this quarter.

Cheesecake Factory (CAKE - Free Report) has an Earnings ESP of +0.32% and it currently has a Zacks Rank #3. The company is scheduled to report second-quarter results on Jul 31, after the market closes.

Restaurant Brands (QSR - Free Report) currently carries a Zacks Rank #3 and has an Earnings ESP of +1.17%. It is scheduled to release second-quarter results on Aug 1, before the market opens.

Brinker (EAT - Free Report) has an Earnings ESP of +1.47% and it currently has a Zacks Rank #3. The company is expected to report quarterly results on Aug 9.

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