Dineequity Profit Rises As Applebee's Improves, I H O P Struggles

DineEquity Inc. (DIN), which posted second-quarter earnings Tuesday, is hoping new leadership and some of the things it learned in its Applebee's Neighborhood Grill & Bar chain will help its struggling IHOP restaurants.

Since acquiring Applebee's in 2007, DineEquity has been able to boost guest traffic and profit margins by remodeling restaurants, updating the menu and improving marketing. However, as IHOP continues to struggle, DineEquity is replacing IHOP President Jean M. Birch, effective Aug. 27, and Chairman and Chief Executive Julia A. Stewart will oversee the brand's day-to-day operations until a successor is identified.

DineEquity's shares rose 14% to $52.55 in recent trading Tuesday, as its quarterly revenue fell less than expected and adjusted earnings per share also beat analysts' estimates.

Since the recession, family-dining and bar-and-grill chains have had a hard time striking a balance between offering guests a good deal and maintaining restaurant profit margins. Ms. Stewart says that Applebee's has found that balance, but IHOP has not.

"There is a fundamental issue with the menu at IHOP," Ms. Stewart said on a conference call. "We have too many items on it; it's too difficult to execute; and the consumer has told us loud and clear...some of the items have gotten too expensive." She said the team is implementing Applebee's strategy to develop menu items in a way that franchisees make money and guests feel like they got a good value. But she warns, it will take time.

"I can't do it all at once. It's physically impossible" for franchisees and employees to execute, plus "it's too overwhelming for the guests," she said. "So, you're going to see continued evolution of the menu for the next 18 to 24 months." IHOP has at least three menus scheduled to come out next year. "We did the exact same thing at Applebee's, and learned...if you do it in sections, it's doable," she said.

In the recent quarter, Applebee's company-operated restaurant operating margin rose to 16.9% from 13.4% a year earlier and its guest traffic was flat. Sales at established locations, or same-restaurant sales, rose 0.7% at Applebee's and fell 1.4% at IHOP, though both results fell below analysts' expectations according to Consensus Metrix.

"There is no question that the economic headwinds definitely hurt us, especially at Applebee's," Ms. Stewart said. And at IHOP, "you can see a direct correlation between price increases and traffic decline," she added.

DineEquity is hoping IHOP's "7 items for $7 each" menu promotion and new "Trio of Pancakes" for $4.99 will attract more value-hungry customers, but Ms. Stewart says it's going to take more than promotions to restore guest traffic growth. "At the core, we have got to fix this menu," she reiterated.

The company also is cutting costs by selling remaining company-owned Applebee's to franchise operators and combining some Applebee's and IHOP operations.

DineEquity agreed last week to sell 65 company-operated Applebee's in Michigan to TSFR Apple Venture LLC for about $61 million, nearly completing its transition to becoming a 99%-franchised business. The model allows the company to create a more stable revenue stream and use the proceeds from the sales to pay down debt. It also further insulates it from the volatility of commodity costs and day-to-day restaurant operations.

Additionally, the company said it's eliminating another 100 positions to "realize more efficiencies" by combining some Applebee's and IHOP operations. DineEquity said the move will generate about $10 million to $12 million in annualized savings.

When IHOP acquired Applebee's, eight of Applebee's top executives left the company as Ms. Stewart prepared to revamp the brand.

DineEquity reported a second-quarter profit of $16.9 million, up from $348,000 a year earlier. After the payment of preferred stock dividends, the company swung to a per-share profit of 88 cents from a loss of two cents. Excluding items such as debt-extinguishment, impairment and closure charges, adjusted earnings rose to $1.06 a share from 90 cents.

DineEquity's revenue fell 15% to $229.4 million from $268.3 million, as the company owned fewer restaurants than last year after selling more to franchisees.

Analysts polled by Thomson Reuters had most recently forecast earnings of $1.01 a share on revenue of $223 million.

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