DineEquity Inc. (DIN) reported third quarter 2012 adjusted earnings of $1.03 per share, substantially exceeding the Zacks Consensus Estimate of 93 cents. However, the adjusted earnings missed the prior-year earnings by a penny. The decrease was mainly attributable to an expected dip in profit resulting from the refranchising of Applebee’s company-operated restaurants and lower cash interest expense.
On a reported basis, the company earned $3.14 per share compared to 85 cents in the year-ago quarter.
Inside the Headline Numbers
Revenues in the reported quarter dipped 18.2% year over year to $216.3 million, but surpassed the Zacks Consensus Estimate of $209.0 million.
DineEquity operates under Applebee's Neighborhood Grill & Bar and IHOP brands. Applebee's domestic system-wide comparable-store sales improved 2.0% during the quarter, with a surge in franchised same-restaurant sales of 2.2% and company-operated comparable restaurant sales of 0.5%. Total comparable-store sales improved on year-over-year basis driven by uptick in average guest check, partially offset by lighter traffic.
The domestic system-wide same-store sales of IHOP dipped 2.0% during the quarter due to lower traffic, partially offset by marginal improvement in average guest check.
Restaurant operating margin at Applebee's company-operated restaurants jumped 130 basis points (bps) to 15.5% during the quarter. The surge was attributable to refranchised lower margin restaurants and termination of depreciation on restaurants apprehended for sale, partially offset by higher commodity and labor costs.
During the third quarter, DineEquity opened 5 and closed 7 Applebee’s franchised restaurants. The company also opened 12 IHOP franchised restaurants and shut down 4 franchised units. At the end of the quarter, DineEquity had 2,016 Applebee’s and 1,565 IHOP restaurants.
The company has been focusing on the franchise business model since 2011. In this connection, DineEquity has now achieved the milestone of Applebee’s refranchising program. Applebee’s company operated units are now 99% franchised, which can be considered to be fully franchised. DineEquity currently has retained 23 Applebee’s company-operated restaurants for test market purposes.
DineEquity ended the reported quarter with cash and cash equivalents of $71.8 million and shareholders’ equity of $283.1 million.
The company is in a deleveraging mode. It has reduced term loan balances by $175.2 million, retired $3.6 million senior notes and $76.6 million of financing and capital lease obligations for the first nine months of the year.
DineEquity reiterated its system-wide sales, unit openings and capital expenditure guidance for full year 2012. The company continues to expect Applebee's domestic system-wide comparable-store sales in the range of 0.5% to 2.5% and domestic system-wide same-store sales in the range of (1.5%) to 1.5% for IHOP.
Applebee's franchisees plan to open 30 to 40 restaurants by year-end, half of which are expected in the domestic market. IHOP franchisees expect to open 45 to 55 restaurants, mostly in the domestic market. DineEquity reaffirmed its capital expenditure guidance in the range of $18 million to $20 million.
The company toned down its expectation for cash from operations to the range of $43–$55 million (earlier $110–$122 million) and free cash flow in the range of $36–$50 million (earlier $103–$117 million).
We expect the estimates to go up in the coming days as the company reported better-than-expected results. Applebee's is poised for long-term success, based on marketing, menu innovation and operational improvements. Moreover, with the achievement of Applebee's transition to a fully-franchised restaurant system, the company is likely to reduce the volatility of cash flow going forward. However, comps at IHOP brand continue to decline and the company still has a long way to go.
DineEquity currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
One of the company’s peers, Brinker International Inc. (EAT), recently reported first-quarter 2013 adjusted earnings of 37 cents per share, lagging the Zacks Consensus Estimate by a penny.
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