Under the heading of "Wonders Never Cease," shares of restaurant operator DineEquity Inc. (DIN) rose 13 percent on Wednesday after the company posted a surprise profit, albeit on an adjusted basis.
DineEquity, which owns the Applebee’s and IHOP chains, said it earned 34 cents per share excluding a huge write-down on the value of Applebee’s goodwill and intangible assets.
Analysts surveyed by Thomson Financial forecast a Q4 loss of 9 cents per share. Including the write-down the loss was $136.9 million, or $8.15 per share. Revenue grew 66 percent to $355.5 million due to the addition of Applebee’s, which was acquired in November 2007.
In reading over the company’s earnings release it becomes evident that the gain in the shares on Wednesday can best be described as a dead-cat bounce, at least in the short-term.
Chairman and CEO Julia A. Stewart said the results for the quarter and full year “reflect the significant contraction of consumer spending in the second half of the year.” Same-store sales at IHOP restaurants fell 1 percent in the quarter and 4.6 percent at Applebee’s.
The company said it expects 2009 same-store sales at IHOP restaurants to be between 1 percent lower and 1 percent higher than 2008, and down between 2 percent and 5 percent at Applebee’s. Nevertheless Ms. Stewart believes that IHOP is well positioned to extend its lead in family dining even in this challenging environment.
The company is taking pro-active steps to reposition the Applebee’s brand to drive future growth. These initiatives include strategic menu updates and expanded marketing efforts throughout the year.
DineEquity has a strategy to franchise most of Applebee’s company-operated restaurants. It sold 103 in fiscal ’08, and despite the difficult credit market it still expects to sell about 200 more this year. Analysts say that goal looks to be ‘aggressive’ but Stewart cites ‘strong interest’ from prospective buyers. Time will tell. In the meantime the company will focus on margin improvement and profitability enhancement.
DineEquity is continuing to maximize financial flexibility through a combination of the aforementioned re-franchising and sale-leaseback proceeds, rental obligation assignments and is using free cash flow to retire debt. The company said it reduced its leverage levels by $500 million in fiscal 2008 and is taking further steps to maximize financial flexibility.
The restaurant business will remain challenging until this recession ends. More people are saving money by dining at home. That trend will be tough to overcome for DIN, but if it does watch out.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
