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Bear of the Day: DineEquity (DIN)

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The perils of the budget retail restaurant industry have been well-documented. Some brands have been able to adapt, but shifting consumer habits and rising food and labor costs have hurt nation-wide casual chains. Unfortunately, DineEquity (DIN - Free Report) has emerged as one of the weakest of the bunch right now.

DineEquity franchises IHOP and Applebee’s restaurants. The company as it stands today was formed after a merger in 2007. DineEquity operates through a 100% franchised structure and currently has about 3,700 restaurants in 19 countries.

The company was able to exceed earnings expectations in its most recent quarter, but its post-earnings run has been overextended, and its current share price does not align with analyst sentiment. DIN is currently a Zacks Rank #5 (Strong Sell) and looks like one to avoid as we approach the New Year.

Latest Earnings Results

DineEquity reported its third-quarter fiscal 2017 earnings on November 9. The company posted earnings of 91 cents per share, which beat the Zacks Consensus Estimate of 88 cents but fell 37.8% year-over-year. Revenues of $144.7 million were below our consensus estimate and down 7.3% from the year-ago period.

IHOP’s domestic comps fell 3.2%, adding to the prior-year quarter’s decline of 0.1%. Comps at domestic Applebee’s restaurants were down 7.7%, which compares unfavorably to a slump of 5.2% in the prior-year quarter.

Despite weak comps across the board, DineEquity management believes that the IHOP brand remains solid. However, Applebee’s is struggling to compete with fast-food and fast-casual competition, as well as a shift to at-home cooking and eating.

Earnings Estimates and Key Stats

DineEquity’s sluggish results have ushered in several negative earnings estimate revisions. The Zacks Consensus Estimate for its current quarter earnings has slipped by 30 cents over the past 60 days, while our consensus estimate for its upcoming fiscal year has lost 67 cents over that same time period.

The company also has some balance sheet concerns. Its Debt/Capital ratio is at about 85%, which is significantly higher than the “Retail – Restaurants” industry average of 36%. What’s worse, its cash flow is retreating at a rate of 6.34%, and its Sales/Assets ratio sits at a measly 0.29.

DineEquity shares have been moving higher recently, and it looks like the stock is benefitting from some end-of-year portfolio rebalancing. Companies in its industry also stand to benefit from the GOP tax plan, as restaurants typically pay higher effective tax rates.

However, the fundamental picture for DIN appears wobbly at best. Analysts know about the tax cut too, and yet estimates have been moving significantly lower. For investors looking for a stronger pick in the restaurant space, Famous Dave’s is currently sporting a Zacks Rank #1 (Strong Buy), while Good Times Restaurants (GTIM - Free Report) is a Zacks Rank #2 (Buy).

Want more stock market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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Good Times Restaurants Inc. (GTIM) - free report >>

Dine Brands Global (DIN) - free report >>

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