Investors are losing their appetite for DineEquity Inc. and might not find this week’s annual earnings report much more appealing, as the franchiser of Applebee’s and IHOP restaurants is expected to report a decline in revenue.
The market got a taste of the bad news on Feb. 17, when the company announced that its longtime chief executive, Julia Stewart, was stepping down. The news sent the Glendale company’s stock stumbling nearly 10 percent to close at $60.14.
Stewart’s March 1 departure will coincide with the scheduled release of DineEquity’s annual report. The company said in the statement announcing Stewart’s exit that fourth-quarter sales at IHOP and Applebee’s Neighborhood Grill and Bar declined 2.1 percent and 7.2 percent, respectively, year to year. It expects to report a 5 percent decline in year-over-year sales for Applebee’s.
Stewart’s resignation might only have added uncertainty, said Brian Vaccaro, an analyst at financial services firm Raymond James & Associates Inc. in St. Petersburg, Fla.
He said Raymond James had continued to recommend DineEquity’s stock despite the weakness at Applebee’s because of IHOP’s performance, its level of faith in Stewart, and the free cash flow for investors.
“But with (the Feb. 17) release, not only did they say Julia was stepping down, but also IHOP’s (same-store sales) were disappointing,” Vaccaro said. “We lost two of the three planks providing a level of confidence in the stock.”
The resignation of Stewart, 61, who orchestrated the 2007 acquisition of Applebee’s International Inc. while serving as the chief executive of IHOP Corp., surprised Vaccaro, he said. The news led Raymond James to downgrade the company’s stock, which it now expects to perform in line with the S&P 500 over the next year, rather than outperforming the index as previously projected.
Jonathan Maze, senior financial editor at trade publication Nation’s Restaurant News, wasn’t so shocked by Stewart’s resignation given how Applebee’s sales had declined over the past year along with the rest of the restaurant industry.
“It’s hard to look at the fourth-quarter numbers and think it doesn’t have anything to do with her departure,” said Maze.
A spokesman for DineEquity declined to comment or make Stewart available for an interview. She will be replaced as chief executive by director Richard Dahl on an interim basis.
Business model
Stewart was an early adopter of a business model more common to fast-food restaurants, where a franchiser owns few corporate stores and the bulk of its revenue comes from royalties and licensing fees. The model meant more free cash flow for the company, which resulted in dividends for shareholders.
At the end of 2015, 99 percent of the companies’ restaurants under both brands were franchised, according to DineEquity’s annual report for that year.
Although the company’s revenue fell to just over $681 million in 2015 from more than $1.6 billion in 2008, its net income grew in the same period to $104 million from a loss of almost $155 million as it shifted corporate-owned stores to franchisees.
Maze said Applebee’s outperformed its peers for much of the past several years. But sales across the restaurant industry declined in 2016 and the fourth quarter was particularly brutal. Even IHOP, which had sustained modest growth last year due in part to the popularity of breakfast, took a dip.
The casual sit-down dining segment has generally suffered since the recession, said Nicholas Upton, a reporter at Franchise Times Corp. “They haven’t rebounded from the recession as others have.”
The industry’s bar and grill segment, which includes Applebee’s, isn’t popular with millennials, who are looking for an experience beyond the food, said Vaccaro.
“The experiential component plays a big role in consumer value perception,” said Raymond James’ Vaccaro. “It’s not just about the price point. It’s about the all-in guest experience.”
Taking toll
The fallout across the industry has cost a number of chief executives their jobs at publicly held restaurant chains. Ruby Tuesday’s, Papa Murphy’s, Noodles & Co., and Fiesta Restaurant Group are all operating under interim CEOs.
DineEquity tried to right the ship in May, when it rebranded Applebee’s as a more upscale experience, switching its gas grills to wood fired and serving hand-cut steaks. But the effort hasn’t succeeded.
“They really messed everything up with their wood-fired grill initiative,” said Franchise Times’ Upton. “It was something nobody asked for and it put them in a category that was already very saturated with individual operators and steakhouse brands.”
DineEquity’s struggles highlight the problems of the asset-light business model, he said.
“It’s popular among larger brands as they get more mature,” he said. “It unloads value for shareholders. But once the industry takes a slowdown, or brands take a turn like Applebee’s, there’s not much left.”
However, analyst Vaccaro said the model remains popular with investors, pointing to the performance of Domino’s Pizza Inc. and Yum Brands Inc., parent of Taco Bell, KFC, and Pizza Hut. The stock of both companies reached an all-time high this month.
“Investors continue to ascribe premium value to highly franchised models versus company-owned business models,” he said. “Perhaps they’ll be more inclined to drill down into the health of the individual brands.”
A new chief executive could turn things around for Applebee’s as Stewart once did, said Franchise Times’ Upton. However, it might be hard for the company to land one.
“There’s a lot of very strong young management teams out there, but they’re looking for something that resonates with millennials,” he said. “It’s going to be hard to get them to come to Applebee’s, where there’s a lot of work to do and it’s an uphill battle.”
A sale could even be in Applebee’s future.
“I’m sure someone would love to have Applebee’s brand for the consumer packaged goods market,” Upton said.
