Applebee’s Grows Fat on Discounts

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Diners at Applebee’s Neighborhood Bar & Grill in Norwalk had to wait 20 minutes for tables on a recent Sunday evening.

Standing amid signs offering dramatic meal discounts, they seemed content to bide their time. Emerging later fully sated, several said it was well worth the wait.

“They had deals for us,” said Omar Wilson, a 30-year-old Long Beach resident who ordered one of the “2 for 20” specials that includes two entrees and an appetizer for $20. “Times are tough and money is important. I thought it would be expensive, but was pleasantly surprised.”

This was the first visit to the national fast-casual chain for the night club bouncer, but he said it certainly wouldn’t be his last. That’s good news for corporate parent DineEquity Inc., the Glendale company that two years ago bought Applebee’s and its 2,000 outlets for $1.9 billion in one of the decade’s biggest restaurant deals.

For a while it seemed the acquisition might sink under its own weight. DineEquity – owner of International House of Pancakes and formerly known as IHOP Corp. – took on some $2 billion in debt to finance the deal, becoming the world’s largest full-service restaurant operator in the process with 3,300 outlets.

The plan was to breathe life into tired Applebee’s by freshening up its menu and sprucing up the restaurants – and pay for it all by franchising most of the 508 company-owned stores.

Then the economy went haywire. Franchisers couldn’t get credit. Customers dramatically slowed their casual-dining dollars. Some wondered whether Chief Executive Julia Stewart, a former Applebee’s executive who engineered the deal, would survive it all as shares hit an eight-year low.

But recent indications are that Stewart’s first steps in revitalizing the chain through new value-priced menu options may be the ingredients for success in the tight economy. Applebee’s saw its second quarter same-store sales decline only 4.3 percent, better than the industry average decline of 6.6 percent.

DineEquity’s stock, as of last week, was up 114 percent year to date – more than any other restaurant company in Los Angeles County. And since the stock’s low of $5.24 in March, last week’s price of more than $24 was more dramatic. Last month, a Morgan Keegan analyst urged investors to buy DineEquity shares – writing in his client note, “Management has proven its ability to turn around a mature brand.”

Stewart, through a company spokesman, declined to be interviewed for this story. Nor would the company otherwise comment, citing its upcoming third quarter earnings announcement later this month.

But in the company’s second quarter conference call in July, Stewart expressed optimism that the enterprise would succeed.

“We believe there is a smarter, better way to approach value in this environment,” she said. “Applebee’s strategy centers on value with new food news.”

Winning strategy?

Destin Tompkins, the analyst at Birmingham, Ala.-based Morgan Keegan, said in an interview that he thinks DineEquity is on the right track.

“The basics of it is that they want to get back to what they believe is the true identity of Applebee’s, which is a neighborhood restaurant,” he said. “It’s a very competitive market, but I think they’re making progress.”

At the center of that progress is the much-touted idea of easy prices in hard times, especially the “2 for 20” deal that many patrons find enticing.

In addition, Applebee’s has added several menu items such as a barbecue chicken salad, French dip sliders and a “surf ’n’ turf” burger topped with grilled shrimp and onions. It has also expanded happy hour, offering half-price appetizers and $3 drinks; launched a carryout program called Carside to Go; and initiated “Pick ’n Pair,” a promotion in which patrons can create their own salad combos starting at $5.99.

“They’ve narrowed their message and gone after value; appealing food at appealing prices,” said Ron Paul, president of Technomic, a food-service consulting firm in Chicago. “They’re using television very effectively to communicate to customers that there’s a real reason to go.”

Paul added that TGF Fridays and Flemings Prime Steak House and Wine Bar have since followed suit. “They were early in terms of communicating the good-value message. I think the outlook is quite good.”

IHOP, meanwhile, is holding its own with a second quarter same-store sales decline of 0.6 percent compared with the same quarter last year. Company officials attributed the decrease to the “challenging economic environment” resulting in shrinking guest traffic.

The restaurant chain, which had been stagnant for years, experienced a growth spurt after a 2005 reorganization expanding its traditional breakfast fare to include lunch and dinner that was promoted by Stewart, who took the chief executive job in 2002.

But some argue that the jury is still out.

Heavy debt

Though the company reported second quarter net income of $18.8 million, compared with a $23.7 million loss a year ago in the quarter, the big picture isn’t yet great. DineEquity so far has been able to sell only 108 of its company-operated Applebee’s, far fewer than the original schedule of 40 a month.

That has meant the company has only been able to whittle away some $237 million of its total long-term debt, still leaving it with $2.19 billion, about six times more than before the deal.

Keith Gelman, publisher of RestaurantChains.com, a Web site that tracks more than 4,000 chains, believes that the IHOP owner took a bold step in acquiring Applebee’s.

The problem, in his view, is that DineEquity management is running two separate chains that have distinct niches, even though IHOP has expanded its lunch and evening offerings.

“They’re trying to keep it separate and parallel, and I question whether that’s possible,” he said, adding the task is a big job for management.

Ultimately, he thinks the pairing may not work out. Whatever the case, the Applebee’s in Norwalk was filled last week with diners, several of whom told the Business Journal they were satisfied.

“I like the food, I like the service and I like the atmosphere,” said Mark Lakey, 52, a Norwalk resident and laid-off construction worker who’s frequented the restaurant for years and likes the good deals. “The restaurant does well. It’s always packed.”

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