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GLENDALE, Calif.—Last week Thursday DineEquity Inc. (NYSE: DIN), the parent company of Applebee's Neighborhood Grill & Bar and IHOP restaurants, announced financial results for the first quarter of 2014. Same-restaurant sales in the United States grew 3.9 percent over 1Q 2013 at IHOP while dropping 0.5% at Applebee's.
Julia A. Stewart, chairperson and chief executive officer of DineEquity, Inc. stated, "I'm pleased to say it is IHOP's fourth consecutive quarter of positive same restaurant sales. The increase in sales reflected a higher average guest check partially offset by a very slight decline in traffic."
Stewart said that the franchisor's focus on menu enhancements, innovative advertising, and higher operating standards helped raise IHOP's restaurant sales numbers. Drawing attention to its marketing efforts, she noted that the IHOP brand was gaining marketing traction with customers through social media. "There were 34,000 @IHOP mentions on Twitter, 9,000 likes on Facebook and we achieved a record 4,000 media hits," stated Stewart.
Restaurant unit economist John Gordon comments that although he listens intently to DineEquity's conference calls with analysts, it is difficult to pierce the franchise wall in this 99 percent franchised chain. But Gordon sees some positive signs: "It is encouraging that IHOP has been able to grow restaurant units." IHOP was up 32 restaurants this quarter compared to the same time last year. Gordon points out that the net increase in restaurant closures "indicates that franchisees are confident in IHOP's future."
In the last year, IHOP, the largest chain in the family dining segment by systemwide sales, has been able to grow faster in same restaurant sales than competitor Denny's (see chart), which is the second largest giant in this segment. Denny's company-owned restaurants increased in same restaurant sales in the first quarter of 2014 by an excellent 3.2 percent over 1Q 2013, while the increase for domestic franchised restaurants was a quite respectable 1.5 percent.
Unfortunately, franchise owners of Applebee's casual dining restaurants did not fare so well. Its same store sales decreased by 0.5 percent in the first quarter of 2014 compared to the same period in 2013. Its traffic slid and the number of its restaurants went down by 21.
"We're hitting the reset button at Applebee's," said DineEquity's Stewart in response to yet another negative quarter in traffic and same store sales for the casual dining chain.
The CEO told analysts that DineEquity was committed to the key growth initiative of franchisees developing both domestically and internationally. "At Applebee's, we are conducting a comprehensive assessment of the brand, with the goal of achieving consistent and positive same restaurant sales and traffic." She added that it is now time for the company to hit the reset button to stop the slippage.
Certified forensic financial analyst John Gordon adds that Applebee's really needs a boost of positive traffic and to generate sales gains in order to cover the natural erosion from profits of food and wage inflation. "Applebee's average annual volume for its restaurants is $600,000 to $800,000 below other casual diners," says Gordon. These other dining brands include such brands as TGI Friday's, Buffalo Wild Wings and even Darden. The unit analyst thinks Applebee's has less room for error "since its sales base is so much lower."
One opportunity that will help franchisees' bottom line is to have the franchisees' own national franchisee purchasing cooperative keep a lid on prices in the supply chain. "We continue to collaborate with the purchasing co-op to create opportunities for all of our franchisees to save money in the middle of the P&L," said Miller of the desire of both franchisees and the few franchisor stores to lower supply costs. She wasn't clear in the conference call on exactly how Applebee's or parent company DineEquity would collaborate with the franchisees' purchasing company.
The first quarter same-store-sales number dipped 0.5 percent compared to last year. Moreover, Applebee's same restaurant sales during the same period last year were down 1.3 percent. There's more bad news for franchise owners who hope for a growing system. With nearly 99 percent of its stores franchised, Applebee's contracted by a net of 21 locations since its 2,006 units at the end of March, 2013. IHOP has 1,608 franchises and area licenses, up a net 32 units from the end of the first quarter of last year.
CEO Stewart stated that Applebee's franchisees have already remodeled 64 restaurants in the first quarter. At the end of the quarter the system is now 75 percent remodeled. "We project that 95 percent of the domestic system will be done by the end of this year," she said.
The franchisor is actively evaluating prevailing interest rates and the economic environment to determine the optimal timing for debt refinancing. It anticipates refinancing some or all of its long-term debt in 2014 if financial market and economic conditions are favorable. The company is also assessing its international development strategy.
That has Janney Capital Markets' Mark Kalinowski giving a buy ranking to stock investors. "The Street is under appreciating opportunities the company has to refinance much of its $1.2 billion in long-term debt," says the analyst. Kalinowski anticipates DineEquity refinancing its high debt load to lower rates within the next 12 months.
Fitch Ratings adds that DineEquity may refinance its high interest notes with a lower cost whole-business securitization that uses anticipated royalties from franchisees as collateral.