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DineEquity Beats on EPS, Revs Down

TXRH DIN

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DineEquity Inc.(DIN - Snapshot Report) reported fourth quarter 2011 adjusted earnings of 91 cents per share, surpassing the Zacks Consensus Estimate of 85 cents as well as the prior-year earnings of 59 cents per share. In 2011, adjusted earnings were $4.29 per share versus $3.50 in the prior year.

 

Revenues in the reported quarter plunged 19.3% year over year to $242.3 million. In fiscal 2011, revenue increased 24.0% year over year to $1.08 billion.

Inside the Headline Numbers

DineEquity operates under Applebee's Neighborhood Grill & Bar and IHOP brands. Applebee's domestic system-wide comparable store sales inched up 1.0% during the quarter, with franchise same-restaurant sales up 0.8% and company-operated comparable restaurant sales rising 3.4%. The domestic system-wide comparable store sales improved sequentially, but fell on year-over-year basis.

The domestic system-wide same-store sales at IHOP dipped 1.0% during the quarter due to lower traffic.

Restaurant operating margin at Applebee's company-operated restaurants dropped 70 basis points (bps) to 14.8% during the quarter, attributable to a spike in labor expense and investment in local advertising, partially compensated by refranchising of lower margin restaurants and higher traffic.

Store Update

During the fourth quarter, DineEquity opened 12 and closed 3 Applebee’s franchised restaurants. The company also opened 16 IHOP franchised restaurants as well as three area licensed restaurant and shut down 1 franchised unit. At the end of the quarter, DineEquity had 2,019 Applebee’s and 1550 IHOP restaurants.

 

In the fourth quarter, the company successfully completed the refranchise and sale of 66 company-operated Applebee's restaurants located in New England and for the first quarter of 2012, DineEquity expects to refranchise and sell 17 Applebee’s company-operated restaurants located in six-state markets around Tennessee. These are in line with the company’s strategy of transitioning to a franchise based model.

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 $60.7 million and shareholders’ equity of $155.2 million.

The company is in a deleveraging mode. In 2011, the company has reduced term loan balances by $161.5 million, retired $59.3 million of the 9.5% senior notes and $87.9 million of financing and capital lease obligations. DineEquity has reduced long-term debt, less current maturities from $1.6 million in 2010 to $1.4 million in 2011.

Outlook

The largest full-service restaurant company in the world expects Applebee's domestic system-wide comparable store sales in the range of 0.5% to 2.5% for fiscal 2012. The company also expects domestic system-wide same-store sales 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, menu innovation, operational improvements and remodel program. Moreover with about 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. Additionally, domestic systemwide same-restaurant sales of IHOP has improved sequentially for two quarters, but still comps remain in the red and the company still has a long way to go.

DineEquity, which competes with Texas Roadhouse Inc (TXRH - Snapshot Report)), 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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