DineEquity: Refranchising, Upgrades Strategy Boosted 1Q Results

NRN.com|May 1, 2012 5:10 pm EST

IHOP and Applebee's parent DineEquity Inc. on Tuesday reported a 5.5-percent increase in profit for the first quarter, saying revitalization efforts for both brands are on track, but more work needs to be done.

The company also disclosed an asset purchase agreement for the sale of 39 company-operated Applebee's locations in Virginia to Potomac Family Dining Group LLC, as part of the chain's ongoing refranchising effort.

The deal, which is expected to close in the third quarter, is expected to result in proceeds after taxes of about $25 million and reduce DineEquity's sale-leaseback obligations by about $40 million, plus another $1.6 million in annualized general and administrative savings. DineEquity expects to pay about $6 million related to the deal. It is the second batch of Applebee's restaurants acquired by Potomac Family Dining, which bought about 30 units in the Washington, D.C., area in 2010.

Once the sale is complete, Applebee's will be about 96-percent franchised. Since acquiring the Applebee's chain in 2007, DineEquity has sold 342 company-operated restaurants, including 17 sold during the first quarter in a six-state market area around Memphis, Tenn.

Julia Stewart, DineEquity's chief executive, said the refranchising strategy helped boost results for the first quarter, ended March 31. However, Stewart said more needs to be done to differentiate both brands, and DineEquity is focused on speeding innovation efforts.

At the 2,018-unit Applebee's, for example, more than 90 percent of menu items have been replaced or upgraded in recent years, and Stewart said new New Orleans-style dishes on the two-for-$20 menu have done well, such as the Blackened Chicken Penne and the Bourbon Street Chicken and Shrimp sizzling platter.

During the first quarter, 87 Applebee's were renovated, bringing the total number of restaurants with the new look to 671, or 36 percent of the system. Stewart projected that about half of Applebee's restaurants will be remodeled by the end of the year. Those that have completed the upgrade are seeing a mid-single-digit increase in sales, she said.

DineEquity is continuing to work on fine-tuning the value message for both brands, but particularly for the 1,551-unit IHOP, which has struggled in recent years.

Stewart said the company may have found its "sweet spot" with its first nationally promoted deal for IHOP, the new "7 for $7" menu that rolled out earlier this year, which allows guests to choose from seven meal options for $7 every day.

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IHOP is also planning to launch a new ad campaign in the second quarter and has worked to improve customer service in restaurants.

The company is still evaluating how its overall marketing strategy is working for the brand, but Stewart said sales of more healthful and low-calorie items have increased steadily and the "7 for $7" items are winning about 5 percent of the mix.

For the long term, Stewart said, the company is still working on what the right value message should be for IHOP. "The good news," she said, "is that franchisees are very supportive and aligned with the notion of creating the right value message."

For the year, DineEquity reiterated its outlook, saying same-store sales increases at Applebee's will likely range between 0.5 percent and 2.5 percent; and between negative 1.5 percent and positive 1.5 percent at IHOP.

Applebee's franchisees are expected to develop 30 to 40 new restaurants, about half of which will be in the U.S.

IHOP franchisees and area licensees are expected to open 45 to 55 new locations, mostly in the U.S.

DineEquity reported net income of $31.3 million, or $1.64 per share, compared with $29.7 million, or $1.53 per share, in the prior-year period. Domestic systemwide same-store sales increased 1.2 percent at Applebee's, which the company said was driven by a higher average guest check but partially offset by a decline in traffic.

At IHOP, domestic systemwide same-store sales dropped 0.5 percent for the quarter, driven mostly by a decline in traffic that was offset slightly by a higher guest check average. Revenues declined 18 percent to $245.6 million for the quarter, reflecting ongoing franchising efforts.

DineEquity said it reduced its debt by $85.9 million during the quarter. Since acquiring Applebee's for $2.3 billion, the company has reduced its debt by $795 million.

Editor's Note: An earlier version of this story had incorrectly stated that the "7 for $7" promotion accounted for 7 percent of the menu mix. The correct number is 5 percent.

Contact Lisa Jennings at lisa.jennings@penton.com.
Follow her on Twitter: @livetodineout