Serving Up Tasty Return Potential
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DineEquity (NYSE: DIN) owns and operates two very distinct restaurant concepts: Applebee’s and IHOP. Based on growth patterns and fundamental valuations this restaurant business is well positioned to grow in the domestic and international market. Applebee’s locations can be found in 16 countries with appeal to those looking for a reasonably priced/good taste dining experience. After the refranchising and sale of 132 company-owned restaurants, there are currently over 2,000 Applebee’s location. 58 new IHOP restaurants opened in last year, bringing the total up to more than 1,400 locations as the restaurant gains acceptance into key markets such as Canada and Mexico.
Over the last fiscal year net income jumped to $75 million from a loss of $3 million in the prior period. Although total sales slumped, despite modest franchising revenue growth, company related expenses fell significantly from nearly $700 million to $458 million. Management is running tighter business operations resulting in significant margin improvements as sales fail to impress.
Initial performance seems lackluster but is more or less in line with and even slightly better than the competition. IHOP is similar to Denny’s (NASDAQ: DENN) which saw drops in both company restaurant sales and franchising and licence revenues. Although Denny’s experienced a same-store sales increase of 0.7% while IHOP’s corresponding figured signalled a 2% drop, average guest purchases were higher to compensate for the drop in traffic. Brinker International’s (NYSE: EAT) Chili’s is a fair comparable to Applebee’s. As a whole, Brinker’s consolidated revenues, which includes sales from Maggiano’s as well, remained basically flat on a year-over-year basis. However, due to a lack of the same improvements on operating margins as observed with DineEquity, the bottom line failed to show significant growth. Between the two concepts, same-store sales were in line – Applebee’s same store sales recorded 2.0% revenue growth while 1.7% comparable quarterly sales growth was observed for Chili’s.
Competition in the restaurant space is tight where an ever growing number of locations aim to capture a larger share of a saturated market. With consumers having a wide variety of fast food, casual dining and fine dining options, restaurant operators are often forced to discount their menu items in order to attract guests. Brinker International and Applebee’s are known to offer deep discounts in order to get customers through their doors. Applebee’s, however, has done a much a better job of protecting its net margins. Comparing Denny’s and IHOP, the biggest discrepancy between the two concepts is sales growth; while Denny’s has struggled, as annual sales have fallen by 11% over the last 5 years, IHOP has seen robust improvements in its top line performance.
Comparable store locations will be a key focus of improvement over the short term horizon. As same-store sales stagnate, even larger competitors such as Darden (NYSE: DRI) restaurants are having difficulties competing with cheaper alternatives such as McDonald’s (NYSE: MCD). With various restaurant concepts, including Olive Garden, Red Lobster and Longhorn Steakhouse, Darden realized an annual comparable jump in sales by only 1.4%. McDonald’s on the other hand, saw U.S. same-store-ales soar by 7.8%. DineEquity is faced with a tough position, it must offer low price incentives to attract customers away from fast food giants and direct competitors while protecting its margins. International expansion should be another source of focus of driving sales growth, for new and existing locations.
Management will play a key role in the future success of DineEquity. Fortunately, the top executives within the company have the necessary background to push the company forward. Chairman and CEO Julia Stewart has nearly 40 years of industry experience and has been with DineEquity since 2001. Michael Archer is the President of Applebee’s and comes with former experience as president and COO at T.G.I Friday’s. Jean Birch, President of IHOP has served in various capacities with Brinker International.
The stock has fallen by 12% over the last year. It is now well positioned for an upward reversal.
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