DineEquity Inc. (DIN), operating under the Applebee's Neighborhood Grill & Bar and IHOP brands, reported second quarter adjusted earnings of 90 cents per share, missing the Zacks Consensus Estimate of $1.02 but in line with the prior-year quarter earnings. The lower-than-expected results were due to negative comparable sales in the IHOP chain of restaurants.
Revenues in the reported quarter plunged 21.1% year over year to $268.3 million and also missed the Zacks Consensus Estimate of $270.0 million.
Inside the Headline Numbers
Applebee's domestic system-wide comparable-store sales spiked 3.1% during the quarter, with franchise same-restaurant sales and company-operated comparable restaurant sales increasing 3.5% and 0.7%, respectively.
The upside in Applebee's comparable store sales was driven by the ongoing marketing and operational initiatives and new menu offerings aimed at driving traffic. The company reported positive same-store sales for the fourth consecutive quarters but were negatively impacted by the calendar shift of Easter.
IHOP's domestic system-wide same-store sales results dipped 2.9% during the quarter due to lower traffic and inefficient promotional initiatives.
Restaurant operating margin at Applebee's company-operated restaurants dropped 70 basis points (bps) to 13.4% during the quarter, attributable to higher commodity costs, utility rate, facility cost and training and staffing expenses. However, this was partially offset by menu price increases and refranchising of lower margin restaurants.
Store Update
During the quarter, DineEquity agreed to sell 66 company-operated Applebee's restaurants located in New England for $49 million, which is in line with the company’s strategy of becoming more highly franchised. The company continues to focus on the franchise business model as it is less capital intensive and reduces volatility of cash flow. DineEquity also expects to use the sale proceeds for reducing its debt burden. The transaction is expected to close by the end of the year.
During the second quarter, DineEquity opened 5 and closed 4 Applebee’s franchised restaurants. The company also opened 12 and closed 3 IHOP franchised restaurants. At the end of the quarter, DineEquity had 2,012 Applebee’s and 1522 IHOP restaurants.
Financial Position
DineEquity ended the reported quarter with cash and cash equivalents of $34.5 million and shareholders’ equity of $126.2 million.
At the end of the quarter, cash from operation was $48.2 million, capital expenditure was $13.5 million and free cash flow was $41.7 million.
As of June 30, 2011, the company’s long-term debt liability was $1,479.5 million compared with $1,631.5 million as of December 31, 2010. DineEquity remains focused on debt reduction and continues to use its free cash flow and cash proceeds from the sale of restaurants to lower its total debt. During the quarter, the company reduced its long-term debt burden by 9.3%.
For 2011, DineEquity continues to expect capital expenditure of $26 million, cash from operation between $125 million and $135 million and free cash flow in the range of $112 million to $122 million.
Outlook
The largest full-service restaurant company in the world continues to expect Applebee's domestic system-wide comparable-store sales in the range of 2% to 4% for fiscal 2011. The company also reaffirmed its domestic system-wide same-store sales range between negative 2% and positive 1% for IOHP.
For fiscal 2011, Applebee's franchise plans to open 24 to 28 restaurants, half of which are expected to open in the international market. IHOP franchisee expects to open 55 to 65 restaurants, mostly in the domestic market.
Our Take
We expect the estimates to go down in the coming quarters as the company’s IHOP brand continues to struggle. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $4.30 and $4.22, respectively.
One of DineEquity’s primary competitors, Brinker International Inc (EAT) is expected to report its fourth quarter results on August 11, 2011.
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