DineEquity Inc. (DIN), operating under the Applebee’s Neighborhood Grill & Bar and IHOP brands, reported fourth quarter adjusted earnings of 59 cents per share, below the Zacks Consensus Estimate of 64 cents and 76 cents recorded in the prior-year quarter. The lower -than- expected results were due to a decrease in revenue. 

Revenues for the quarter under review declined 15.6% year-over-year to $355.2 million, and were lower than the Zacks Consensus Estimate of $313.0 million. However, the company experienced positive comparable sales in the chain of restaurants under both the brands.

The company’s full-year adjusted earnings per share were $3.50 versus $4.06 in full fiscal 2009. Revenues were $1.3 billion in full fiscal 2010, representing a year-over-year drop of 5.7%.

Inside the Headline Numbers

Applebee’s domestic system-wide comparable-store sales spiked up 2.9% during the quarter, with franchise same-restaurant sales up 3.4% and company-operated comparable restaurant sales up slightly by 0.3% for the same period.

The upside in comparable-store sales results was driven by ongoing marketing, operational initiatives and new menu offerings aimed at driving the traffic. The company-owned restaurants raised prices by 1.2% for the period and experienced a higher average guest check but lower traffic.

IHOP’s domestic system-wide same-store sales results inched up 1.1% during the fourth quarter due to certain limited-time offers and promotions.

For fiscal 2010, Applebee’s comparable-store sales inched up 0.3%, while franchise same-restaurant sales rose 0.6% and company-owned comparable restaurants sales fell 1.3%. IHOP’s same-restaurant sales were flat year over year for the same period.

Restaurant operating margin at Applebee’s company-operated restaurants expanded 210 basis points (bps) to 15.5% during the quarter, driven by lower labor and commodity cost and favorable impact from promotions, menu price increase and sale of 83 Applebee’s company-operated restaurants. In 2010, restaurant margin enhanced 40 bps to 14.8%.  

Store Update

During the quarter, DineEquity sold 83 company-operated Applebee’s restaurants in Minnesota, Wisconsin and Virginia in line with its strategy to become a more highly franchised business. The company continues to focus on franchise-based business as it is less capital intensive and reduces volatility of cash flow. DineEquity also expects to use the sale proceed for reducing its debt burden.

During the fourth quarter, DineEquity opened 16 and closed 5 Applebee’s franchised restaurants. The company also opened 25 and closed 4 IHOP franchised restaurants. At the end of 2010, DineEquity had 2,010 Applebee’s and 1504 IHOP restaurants.

Financial Position

DineEquity ended the year with cash and cash equivalents of $102.3 million and shareholders’ equity of $83.6 million.

At the end of 2010, cash from operation was $179.3 million, capital expenditure was $18.7 million and free cash flow was $153.9 million.

As of December 31, 2010, the company’s long-term debt liability was $1,631.5 million as compared to $1,637.2 million as of December 31, 2009. DineEquity remains focused on debt reduction and continues to use its free cash flow and cash proceeds from the sale of restaurants to lower its total debt.

In 2011, DineEquity expects capital expenditure of $26 million, cash from operation to be between $125 million to $135 million and free cash flow to be in the range of $112 million to $122 million.

Outlook

The largest full-service restaurant company in the world expects Applebee’s domestic system-wide comparable-store sales in a range of positive 1% to 3% for fiscal 2011 and IHOP’s domestic system-wide same-store sales between negative 2% to positive 1%.

In fiscal 2011, Applebee’s franchise plans to open 24 to 28 restaurants, half of which are expected to open in the international markets. IHOP franchisee expects to open 55 to 65 restaurants, mostly in the domestic market.

The company expects general and administrative expense to range from $157 million to $160 million and interest expense to range between $140 and $145 million.

Our Take

DineEquity reported below expected results, but posted improved same-restaurant sales at its Applebee’s chain and sees this continuing through 2011 driven by higher menu prices and an improved offering. Hence we expect the estimates to go up in the coming quarters.

One of DineEquity’s primary competitors, Red Robin Gourmet Burgers, Inc  (RRGB) posted fourth quarter 2010 adjusted earnings of 12 cents per share, which surpassed the Zacks Consensus Estimate of 5 cents. Results benefited from the upside in revenue driven by comparable sales growth.

 
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