More Surprises Found at DineEquity: Limitations of the Asset Light Model with No CEO or CFO Now and De Minimus Disclosure

Wednesday's earnings call at DineEquity (DIN) revealed yet more drama. DineEquity's CFO resigned, which ordinarily is surprise enough. But his resignation came on top of the announced departure of long time CEO Julia Stewart, which was announced just last week. The stock fell about 15% in one day. More meaningful to franchisees is that it was announced that 46 Applebee's restaurants were shuttered in 2016. And, another 40-60 restaurants are anticipated to be closed in 2017. Appelebee's same store sales were down 7.2 percent in Q4 and were projected to fall another 4-8% in 2017. IHOP comps were down more modestly in Q4. Fortunately, they are expected to perform better than Applebee's in the zero to plus 3 percent comps zone in 2017.

The closings were a bolt out of the blue. Even the Applebee's franchise disclosure documents are not published yet.

Analysts were told that DineEquity collected Applebee's P/Ls only annually, while IHOP P/L's were collected quarterly. As they had for years, management refused to provide any kind of measure of franchisee profitability, and could not even break down common shared G&A costs between the Appebee's and IHOP brands. Also, the ad agency is being terminated. 

Management discussed the current remedial steps taken of hiring a "workout firm" to help Applebee's franchisees exit the system. They also provided an overview of an unnamed large consulting firm providing Applebee's concept correction and a marketing plan advice and consumer research (note: not me or any of my clients!) for about $10 million in total for 2017. There was also discussion of severance and stock comp costs to be paid.

To be fair, casual dining has been struggling for over twelve years. Applebee's was very weak in 2007, when Stewart, then CEO of IHOP, spearheaded the high debt buyout of Applebee's, which was then a separate publicly traded firm. Dine Equity called the Applebee's franchising deal "asset light." It was a very tight squeeze through the Great Recession. DineEquity sold stores to decrease debt. But numerous menu changes over the years were not able to restore traffic, including a recent "wood grill" design (also tried by Red Lobster) that was said to be a disaster.

When I checked in 2015, Applebee's estimated traffic was down about 20% from 2007 levels.

The purpose of this column is not to dissect asset light as a management and investment approach. Clearly asset light did not "save" this brand or do it any favors from a management standpoint. However, three observations are worth telling.

  1.  For a time, Appebee's kept company stores in the Kansas City market, but those were refranchised, or sold to franchisees in the 2012-2013 timeframe. DineEquity corporate was left "with no skin in the game" regarding knowledge on how to operate restaurants.

  2.  For a time, Applebee's had been running with no brand CEO. Stewart had been pinch hitting in that role. 

  3.  DineEquity's corporate disclosure to investors about Applebee's franchisee performance was practically zero over the years. Stewart noted that the corporation would reveal only franchisee bad debt expense. Yet, Applebee's is a 100 percent franchised brand. How would investors or franchisees know what was going on?