DineEquity Inc. (DIN - Free Report) finally accomplished its target to refranchise the Applebee’s Restaurants system. Commenced in 2008, the program transformed DineEquity’s business to a 99% franchise-centric model, which was hitherto not very common in the full-service restaurant industry. DineEquity acquired Applebee’s International in November 2007 in a leveraged buyout worth $2 billion.
Like other noted restaurant companies in the U.S., DineEquity also shifted its spotlight on franchised operations from company-owned restaurants to reduce the volatility in earnings and increase cash flow generation amid an anemic economy. Franchising is also an important factor for international development.
Operating and expanding through franchising is less capital intensive which in turn enhances free cash flow generation. Further, revenue stream is also remains fixed in the form of fees.
Examples of some other sector behemoths resorting to the refranchising mode are Yum! Brands Inc. (YUM - Free Report) and Burger King Worldwide Inc. . Burger King is working diligently to go 100% franchised.
Yum! also announced its U.S. refranchising initiative at the end of 2007. Yum! expects to retain only 5% ownership in Pizza Hut and KFC by the end of 2012 and anticipates to reduce Taco Bell ownership from 22% to 16% by the end of 2013. The sales process of its entire Pizza Hut UK business has begun as well, and is expected to be fully refranchised in late 2012.
The sale of company-owned Applebee’s restaurants has considerably reduced the debt burden of the company by the use of free cash flow. In the first half of 2012, the company paid down its total debt by $88 million. Management notified that the franchise-oriented model helped the company reduce nearly $800 million in debt since the Applebee's acquisition.
Once the entire process of refranchising is complete, DineEquity expects to issue a revised fiscal 2012 financial guidance with the release of fiscal third quarter 2012 financial results.
DineEquity currently carries a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term ‘Neutral’ recommendation on the stock.
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