Investors Lose Reservations on Restaurant Operator

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When IHOP acquired Applebee’s Neighborhood Grill & Bar in 2007 and formed Glendale restaurant company DineEquity Inc., the plan was to convert all Applebee’s into franchises to boost the casual restaurant’s financials. Five years later, DineEquity has completed the project.

Investor interest perked up last week after the announcement that DineEquity has transitioned nearly 100 percent of its Applebee’s into franchises, save for a handful of company-operated restaurants used for market research.

The company’s shares rose 11 percent during the week ended Oct. 31, closing at $62.70, making it a top gainer on the LABJ Stock Index. (See page 36.)

A strong third quarter helped. DineEquity reported net income of $58.7 million for the third quarter, due to the sale of Applebee’s franchises, compared with $15.5 million in the same period last year. Revenue fell 18 percent to $216 million due to the franchising strategy.

Bryan Elliott, a restaurant analyst for Raymond James & Associates Co. in St. Petersburg, Fla., said investors are bullish on DineEquity because the company kept its promise.

“The company has done a great job of meeting its strategy that it laid out when it bought Applebee’s,” he said. “It has steadily paid down debt and it has effectively improved Applebee’s competitive position in the casual dining space.”

Julia Stewart, chief executive of DineEquity, was not available for comment. The franchise model has worked well for DineEquity, especially during the recession, because it frees up cash flow that would’ve been used for such things as maintenance and repair. The company can instead pay down debt or award dividends, said Conrad Lyon, an analyst at B. Riley & Co. in Santa Monica who used to follow DineEquity.

“It’s probably been a good strategic decision,” he said. “The company will feel less of a burden going forward. That’s the attractiveness of that model.”

Applebee’s has also a consistent boost in same-restaurant sales, which were up 2 percent for the quarter.

Meanwhile, IHOP, which DineEquity used as the model for Applebee’s, has struggled. Same-restaurant sales were down 2 percent for the quarter, reflecting a decline in traffic.

Investors aren’t concerned about IHOP’s sluggish business just yet, Elliott said. The chain is performing similar to competitors as customers increasingly choose grab-and-go breakfast options instead of sit-down meals.

“The family dining sector has been in a somewhat secular contraction for a while,” he said. “IHOP has been able to prosper in the long term despite that through solid marketing and menu innovation. Management is redoubling its efforts in those areas and looking for more value-oriented offerings.”

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