DineEquity Tweaks Value Strategy At Applebee's, IHOP

Applebee's Neighborhood Grill & Bar and IHOP restaurants will continue to emphasize value, but IHOP plans to move away from limited-time-offers, executives of parent DineEquity Inc. said in a call Thursday discussing fourth quarter earnings.

DineEquity swung to a profit in the fourth quarter ended Dec. 31, earning $27.3 million, or $1.51 a share, compared with a loss of $58.1 million, or $3.33 a share, in the same quarter last year. Revenue fell 19.3 percent, to $242.2 million from $299.9 million in the prior year period.

Excluding a one-time tax benefit, the company said earnings would have been $16.4 million, or 91 cents a share.

Same-store sales at Applebee's U.S. units rose 1 percent over last year's quarter, and fell 1 percent at domestic IHOP restaurants.

"Clearly, IHOP is not where we want it to be, but we're seeing some progress," said Julia A. Stewart, chairman and chief executive of DineEquity. Sales showed an improved trend in the quarter, she said.

The economy will continue to influence consumer discretionary spending, Stewart said, and "offering value must remain paramount."

Family-dining brand IHOP saw "initial good results" from the introduction of its new "7 for $7" menu in January, she said, which was supported for three weeks by television advertising. That has now been supplanted by tie-ins with "The Lorax" movie.

Watch a commercial for IHOP's "Lorax" promotion; story continues below

"We recognize that we must continue to be innovative with creative, enticing offerings that satisfy the value-oriented guest," Stewart said.

Part of IHOP's strategy will be "transitioning our promotional platform away from the limited-time-offer strategy to using featured items for longer periods of time," Stewart said, as well as increasing the use of digital and social media marketing.

IHOP "had sort of been notorious ... for historically doing six limited-time offers on television and in-store," she said. Starting in April, IHOP restaurants will feature the regular menu with a separate handout menu with value items, new items and under-600-calorie items for kids.

Casual-dining chain Applebee's will continue its "sizzling entrées" platform, including the Double-Barrel Whiskey Sirloin, and value-oriented 2 for $20 offers, Stewart said.

Watch Applebee's latest 2 for $20 commercial; story continues on next page

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DineEquity executives also discussed:

Refranchising: DineEquity refranchised 132 company-operated Applebee's restaurants in 2011, and 17 more in the mid-South during the first quarter of 2012. DineEquity is now 95-percent franchised, Stewart said. The company is looking to sell 137 of its remaining company-operated Applebee's units. "We'll keep 23 restaurants in Kansas City proper as a test market," Stewart said.

Alcohol sales at Applebee's: Alcohol sales mix in the fourth quarter reached 15 percent, "which is an all-time high for the brand," Stewart said, noting that the increase was seen in both dinner and late-night dayparts. "We are just seeing more people purchasing a drink," she said, adding that sales are aided by "suggested selling" and other programs.

Gift cards: Applebee's card sales increased 6 percent, to $300 million, in fiscal 2011, Stewart said, with $215 million generated from third-party distribution relationships. "Gift card redemptions were roughly 6 percent of system sales in 2011," she said. For IHOP, gift card sales rose 51 percent, to $32 million.

Average check flat: Executives said average checks at Applebee's remain between $12.75 and $12.80, and at IHOP slightly less than $10.

Margins: For fiscal 2011 at company-owned Applebee's, margins were 14.5 percent, compared with 14.8 percent in 2010, said Tom Emrey, DineEquity's chief financial officer. "The decline was caused by higher labor and payroll expenses, commodity inflation and incremental investment in local advertising," he said.

New ad agency: Applebee's said Thursday it had picked Crispin Porter + Bogusky as its U.S. agency of record, moving on from McCann Erickson, New York. CP+B, which lost the Burger King account last year, counts such brands as Coke Zero, Domino's Pizza and Kraft among its clients. The new agency is likely to emphasize Applebee's "neighborhood" connection, Stewart said. "This notion of 'neighborhood' really is something very unique and special that no one else can own," she said.

Debt: DineEquity reduced its debt by 15 percent, or $308.6 million, during 2011, in part with proceeds from selling 132 company-operated Applebee's restaurants to franchisees. At the end of the quarter, DineEquity's long-term debt was $1.41 billion, down from $1.63 billion a year earlier.

DineEquity owns and franchises about 2,010 Applebee's restaurants in 49 states and 16 nations, and 1,535 IHOP units.

Editor's note: This story corrects the spelling of Emrey's name and clarifies that only IHOP is moving from limited-time offers.

Contact Ron Ruggless at ronald.ruggless@penton.com.
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