Might DineEquity Inc. actually cut its way to health in a brutal economy that has defied other company’s cost-reducing strategies?
The owner of the IHOP and Applebee’s restaurant chains shocked Wall Street last week when it reported an adjusted fourth quarter profit of just over $5 million, sending its stock surging more than 40 percent.
Investors were encouraged by the Glendale company’s cost-cutting measures that have helped pay down debt it took on through the 2007 acquisition of Applebee’s.
“It’s been a little more than a year since we closed the acquisition of Applebee’s. The economic environment has certainly changed and is undoubtedly a challenging one,” said Chief Executive Julia Stewart in the company’s fourth quarter earnings conference call Feb. 25. “Despite that, we delivered on our key commitments for 2008.”
Total fourth quarter revenue was $356 million, a 66 percent spike from the same quarter last year due primarily to the addition of Applebee’s.
Still, same-store sales dipped 4.6 percent at Applebee’s and 1 percent at IHOP as consumer spending declined along with the overall economy. Management said IHOP’s same-store sales in 2009 will likely range between a 1 percent loss and a 1 percent gain; Applebee’s same-store sales will decline between 2 percent and 5 percent.
A key component of DineEquity’s strategy since acquiring Applebee’s in 2007 through a $2.1 billion leveraged buyout has been to reduce its buyout-related debt even as consumers reduce spending.
DineEquity sold 108 Applebee’s restaurants last year as part of a franchising strategy and plans to sell approximately 200 more company-owned restaurants this year.
That could prove challenging, analysts said, because the financing options for franchisees have largely evaporated. Rival restaurant chain owner Denny’s said recently that it has had trouble finding financing for a similar franchising effort.
However, during last week’s conference call, Stewart pointed to a number of cost-cutting measures that significantly boosted fourth quarter results, including “improvement in the management of labor expense, and food and beverage cost.”
“We’ve leveraged our core competency around disciplined (general and administrative expense) management, making great progress on the expense control front, which is an important contributor to our financial flexibility in the future,” she said.
Michael Gallo, an analyst with CL King & Associates, said in a client note that the better-than-expected results were primarily to cost-reducing measures implemented by management during the past year.
Debt obligations
Stewart noted that through continued franchising and the use of free cash, the company retired $500 million in debt in 2008 and expects to meet all debt obligations this year. The company anticipates free cash flow this year of between $99 million and $112 million.
“We expect to allocate a portion of excess cash toward opportunistic debt retirement, which we believe is a prudent step that is expected to maximize our financial flexibility and create value for shareholder over the long term,” she said.
In the fourth quarter, DineEquity recorded a $148 million write-down on the value of Applebee’s goodwill and intangible assets. With the charges, the company experienced a quarterly loss of $137 million ($8.15 a share) compared with a loss of $16 million (94 cents) a year ago.
Excluding the charges, DineEquity posted income available to common shareholders of $5.7 million (34 cents). Analysts, who typically do not account for one-time charges, expected a loss of between 6 cents and 9 cents a share.
DineEquity’s shares surged more than 44 percent to $8.50 in early trading on the day the earnings were released before settling back down.
Shares closed at $7.62 on Feb. 26, still down more than 80 percent from its 52-week high of $53.50 per share reached May 20. Restaurant stocks, with some exceptions, have been pummeled by the recession.
