U.S. Markets closed

Refranchising boosts profit for Applebee's parent

GLENDALE, Calif. (AP) -- The parent company of Applebee's and IHOP says the sale of nearly 100 of its restaurants to franchisees helped more than triple its net income in the third quarter.

DineEquity Inc., based in Glendale, Calif., says it also completed its transition to a fully franchised model earlier this month, a move that's intended to cut down on overhead costs, free up capital and boost profit margins. The business model means companies rely more heavily on franchising fees rather than sales from restaurants they own and operate. The downside is that companies exert less control over how their restaurants are run.

After a streak of expansion that began in the late 1980s, DineEquity and other casual dining restaurants are struggling to grow at a time when customers are watching their spending more carefully. Applebee's found success with its "2 for $20" promotion during the economic downturn in 2008. But competitors such as Chili's have since rolled out similar deals, intensifying pressures for restaurant chains to offer keep prices in check.

Additionally, the casual dining industry — which provides full table service — is facing stiffer competition from the growing popularity of chains such as Panera Bread Co. and Chipotle Mexican Grill Inc., which offer customers a cheaper, convenient alternative that's a step up from traditional fast food.

Notably, DineEquity said traffic at both its chains declined during the quarter. But price hikes at Applebee's lifted revenue from restaurants open at least a year by 2 percent. At IHOP, the figure fell 2 percent despite price increases. The figure is a key metric in the restaurant industry because it strips out the impact of newly opened and closed locations.

For the year, the company said it still expects the figure to rise between 0.5 percent and 2.5 percent for Applebee's. At IHOP, the company expects it to be up or down up to 1.5 percent.

For the three months ended Sept. 30, the company said it earned $58.7 million, or $3.14 per share. That's up from $15.5 million, or 85 cents per share, in the year-ago period.

The results were boosted by the sale of 98 Applebee's restaurants to two franchise operators for after-tax proceeds of $87 million. An additional 39 Applebee's restaurants were sold off in the current quarter for proceeds of $24 million.

Total revenue fell 18 percent to $216.3 in large part because of the refranchising of 98 of its Applebee's restaurants.

DineEquity has more than 3,500 restaurants in 18 countries.