DineEquity Beats on Bottom Line
DineEquity Inc. (DIN) reported fourth-quarter 2012 adjusted earnings of 83 cents per share, beating the Zacks Consensus Estimate by a penny. However, the adjusted earnings missed the prior-year earnings of 91 cents per share. Lower profit generation from the refranchising as well as sale of Applebee’s company-operated restaurants along with increased income taxes have negatively impacted the quarterly earnings.
In 2012, the company’s adjusted earnings per share were $4.28, breezing past the Zacks Consensus Estimate and the year-ago quarter’s earnings of $4.29 per share.
Inside the Headline Numbers
Revenues in the reported quarter dipped 34.5% year over year to $158.6 million, which was below the Zacks Consensus Estimate of $161 million. In 2012, total revenues decreased 21% year over year to nearly $849.9 million.
DineEquity operates under Applebee's Neighborhood Grill & Bar and IHOP brands. Applebee's domestic system-wide comparable-store sales improved 0.9% during the quarter, with a surge in franchised same-restaurant sales of 0.9%, offset by a 3.3% decline in the company-operated comparable restaurant sales. Comparable-store sales in the quarter were driven by the rise in average guest check, offsetting the reduction in traffic.
The domestic system-wide same-store sales of IHOP dipped 1.6% during the quarter due to lower traffic, which was partially offset by marginal improvement in average guest check.
Store Update
During the fourth quarter, DineEquity opened 20 and closed 2 Applebee’s franchised restaurants. The company also opened 20 IHOP franchised restaurants and shut down 4 franchised units. At the end of the quarter, DineEquity had 2,034 Applebee’s and 1,581 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.
Liquidity
DineEquity ended the reported quarter with cash and cash equivalents of $128.6 million versus $75.5 million in the previous quarter. The company’s shareholders’ equity was $308.8 million versus $283.1 million in the third quarter. The company is in a deleveraging mode. It has reduced term loan balances by $206.3 million, senior notes by $3.1 million and $123.2 million of financing and capital lease obligations for 2012.
2013 Outlook
For 2013, the company expects that domestic system-wide comparable-store sales both at Applebee's and IHOP will be in the range of down 1.5% to up 1.5%.
Applebee's franchisees plan to open 40 to 45 restaurants by year-end; most of which will be located in the domestic market. IHOP franchisees expect to open 50 to 60 restaurants mainly in the domestic market. DineEquity stated that its capital expenditure will be in the range of $8 million to $10 million.
The company estimates that its cash from operations will lie in the range of $88–$102 million and free cash flow in the range of $77–$93 million.
Our Viewpoint
Although DineEquity has 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, the company’s current financial results with lower earnings reflect that the company has a long way to go.
Currently, DineEquity retains a Zacks Rank #3 (Hold). Another restaurateur Red Robin Gourmet Burgers Inc.’s (RRGB) adjusted earnings in the fourth quarter of 2012 were way ahead of the Zacks Consensus Estimate as well as the year-ago quarter’s earnings. Red Robin Gourmet currently carries a Zacks Rank #1 (Strong Buy).
Other restaurant companies like Krispy Kreme Doughnuts, Inc. (KKD) and Burger King Worldwide, Inc (BKW) both with a Zacks Rank #2 (Buy) are expected to perform well, going ahead.
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