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Giant IHOP Leads Family Dining in 2013

IHOP mug
An IHOP mug. Photo by Thomas Hawk

GLENDALE, Calif. – The parent company of IHOP, DineEquity Inc. (NYSE:DIN), announced last Wednesday that IHOP same-restaurant sales growth for 2013 increased by 2.4 percent over 2012.

The chain, known best for its stacks of pancakes, did even better in its fourth quarter: comparable restaurant sales increased 4.5 percent versus the same period in 2012. Such performance is even more impressive when considering that it happened in the depressed restaurant segment of family dining during the numerous winter storms that have kept customers away from many restaurants.

"The sales performance is a testament to the hard work and dedication of the IHOP team and especially our franchisees," said DineEquity chairman and CEO Julia Stewart to analysts in last week's earnings call. She added, "The increase in same-restaurant sales reflected our higher average guest check, primarily due to our favorable shift in product mix." One of the things that IHOP did to raise average guest check amounts was put bigger ticket menu items in more prominent positions on the menu.

Chart: Blue MauMau; Source: Company SEC Filings

Restaurant analyst Mark Kalinowski of financial services firm Janney Montgomery Scott takes note of what's under the financial hood for the franchisor. "The Street is under-appreciating opportunities the company has to refinance much of its $1.2 billion in long-term debt." Kalinowski estimates that the lower, better debt deal will permit the company to meaningfully raise its dividend "as the most likely use of the net savings from the refinancing." That financing expectation has Janny's analyst recommending DineEquity as a buying opportunity for stock investors. Regarding the performance of its franchises, the analyst says IHOP pleasantly surprised in its 4.5 percent same-store sales climb, topping the 3.7 percent estimate.

DineEquity's Stewart tempered the upbeat mood over the increased same-restaurant sales figure, stating that "The increase was partially offset by a slight decline in traffic." Both IHOP and Denny's have been able to push up average ticket prices to offset their lowered customer traffic. That slump in guest traffic comes despite IHOP increasing its social media efforts from three platforms – Facebook, Twitter and YouTube – to eight in order to better reach customers and grow visits.

Two bright giants in the sagging family dining segment

Bonnie Riggs, a 25-year research and analyst veteran of the restaurant industry, explains the environment in which giants IHOP and Denny's are performing so well. "The 2013 [same-restaurant sales] numbers for both Denny's and IHOP are really bucking the trend," says Riggs of foodservice researcher The NPD Group. "This segment has not done well in a long, long while – even before the recession," she adds. The analyst says that the family dining segment has always depended on attracting an older demographic. "But baby boomers [those aged between 50- and 68-years-old in 2014] are reaching out to many different segments and concepts," says the analyst. She says that the aging midscale restaurants have lost out to newer fast casual restaurants that offer baby boomers and newer generations perceptions of fresher ingredients, better quality and affordable prices.

Chart: Blue MauMau   Data: The NPD Group

While IHOP's company-owned restaurants shrank from 15 to 12 in 2013, the total number of restaurants under the brand increased by 34 units during the year to 1,593. Top competitor Denny's grew by 12 to 1,700.

The two heavyweight champions, #1 IHOP in systemwide sales versus #2 Denny's and vice-versa when ranked by number of outlets, find themselves in a rarefied arena, duking it out to outgrow one another while others experience numbers heading south.

"We expanded our footprint into non-traditional locations, broadened our international presence and restored positive same-restaurant sales at IHOP," said Stewart. "I'm confident that we can build on these successes." The number of internationally sold franchises in 2013 exceeded 2012's figure by 50 percent, according to the company. The franchising firm's chairman and CEO also explained to analysts that she saw considerable opportunity with international franchises. She noted that family dining may have reached mature numbers in North America, but in the developing world family dining is on the ascendancy. "We are in the process of accessing the international side of the business," she commented to analysts during a conference call. However, when later asked about specifics, she replied that the company is not ready to provide public information for her competitors to use yet. "I'll provide more color on this as the year progresses," she said.

For 2014, IHOP expects same-restaurant sales to grow somewhere between 0.5 and 2 percent. It projects selling 40 to 50 new restaurants, mostly domestic outlets. "We have set the bar high in 2013 and look to carry this momentum into 2014," said Stewart.


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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.