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DineEquity Inc.’s (DIN - Snapshot Report) first-quarter 2013 adjusted earnings of $1.14 per share, outperformed the Zacks Consensus Estimate of $1.01 by 12.9%. However, the adjusted earnings were down 16.2% year over year.

Earnings in the quarter were under pressure due to lower profit generation at Applebee’s company-operated restaurants (the company’s re-franchising activity has adversely affected profits) and weaker top-line offsetting the reduction in general and administrative expenses as well as lower cash interest expenses.

Inside the Headline Numbers

Revenues in the reported quarter dropped 33.6% year over year to $163.2 million, owing to lower comparable-store sales (comps) at Applebee’s and IHOP branded restaurants, decline in traffic and tepid macroeconomic condition in the U.S., which in turn affected consumer spending. Quarterly revenues also missed the Zacks Consensus Estimate of $167 million by 2.5%.

DineEquity operates and franchises restaurants under Applebee's Neighborhood Grill & Bar and IHOP brands. Applebee's domestic system-wide comps were down 1.3% during the quarter. Comps in the quarter were negatively impacted by the reduction in traffic offsetting the rise in average guest check.

Despite a marginal improvement in average guest check, domestic system-wide comps at IHOP also declined 0.5% due to lower traffic.

In the first quarter, DineEquity’s operating margin was 57.9% versus 44.2% in the year-ago quarter. The margin was significantly higher during the quarter as the company’s franchise and restaurant expenses were down 60.2% year over year.

Store Update

At the end of the quarter, DineEquity had 3,600 restaurants under Applebee’s and IHOP brands. DineEquity has restored 40 Applebee’s stores during the quarter. As of Mar 30, 2013, nearly 54% of the restaurants were remodeled in the domestic market. 

2013 Outlook Retained

DineEquity has retained its outlook for 2013. The company expects that domestic system-wide comparable-store sales at both Applebee’s and IHOP will 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 is intending to refurbish 70% of its total restaurants by the end of 2013.

Our Viewpoint

A lower earnings, revenues as well as comps in the first quarter have put DineEquity a step behind this earnings season. Moreover, lower traffic generation due to an anemic economy and increasing competition has added to its woes.

Although DineEquity has shifted focus to franchised operations from company-owned restaurants to reduce the volatility in earnings and increase its cash flow generation, we are yet to see any definite signs of improvement.

DineEquity retains a Zacks Rank #3 (Hold). Some other restaurateurs like McDonald’s Corp. (MCD - Analyst Report) missed our estimates on both lines this season while Yum! Brands Inc. (YUM - Analyst Report) beat earnings but missed out on revenues. Another company, The Cheesecake Factory Inc. (CAKE - Analyst Report) was ahead of the estimates on both counts.

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