DineEquity to focus on IHOP after disappointing 3Q

After another disappointing quarter for IHOP, parent company DineEquity Inc. said Tuesday it will focus efforts on a four-pillar revitalization plan to restore the family-dining brand’s performance.

Julia Stewart, Glendale, Calif.-based DineEquity’s chair and chief executive, said the company has successfully revitalized the Applebee’s brand after acquiring the chain in 2007, and they can do it again, this time for IHOP, despite an economic environment for consumers that will continue to be “lumpy and bumpy.”

Earlier this year, IHOP’s president Jean Birch stepped down and Stewart resumed day-to-day leadership of the chain. In a call to analysts following the release of third-quarter results, Stewart said the company is not looking for a new president and that she would remain in the role to “ensure everyone’s attention” as they work toward a turnaround for IHOP.

For the quarter ended Sept. 30, DineEquity’s net income almost quadrupled to $58.7 million, or $3.14 per share, compared with $15.5 million, or 85 cents per share, a year ago. Adjusting for exclusions, however, earnings declined about 1 percent to $18.9 million, or $1.03 per share, compared with $19.1 million, or $1.04 per share, a year earlier, reflecting lower profits as a result of refranchising.

Revenues declined 18 percent to $216.3 million. For Applebee’s, domestic same-store sales increased 2 percent for the quarter, largely on increases in average check offsetting traffic declines.

IHOP, however, reported a same-store sales decline of 2 percent as a result of declining traffic offset by a slightly higher guest check, the company said.

Stewart outlined a four-pillar “plan for improvement” that was presented to IHOP franchisees during the annual franchise gathering in September. The plan includes:

• Revitalizing the menu. “It’s about the food, plain and simple,” said Stewart, who promised a new menu will debut in 2013 with fewer items and more craveable and innovative breakfast offerings.

The menu will also be re-engineered for value — a theme that Stewart has repeated over several quarters in discussing IHOP’s positioning.

• Operational excellence. In July, DineEquity officials completed the development of a new protocol for restaurant inspections to ensure all are improving aspects like speed of service and the warmth and friendliness of servers. Units that don’t meet standards are given better training.

• Maximizing media. The company is evaluating how it spends marketing dollars among various media channels and when, is improving tools to measure the impact, and is fine-tuning the brand message.

• Ensuring advertising effectiveness. Ads featuring IHOP’s signature pancakes have driven traffic and put the brand at the top of mind for consumers, but the company is evaluating how such advertising can be improved to attract new guests and encourage existing customers to visit more often.

Stewart said the company has received “incredible buy-in” from franchisees on the plan, and that he feels they’re primed for success. “Our track record of success with Applebee’s turnaround gives us great confidence that we can and will successfully execute on our strategy to restore performance at IHOP through bold and decisive thinking, just as we did when Applebee’s was acquired,” she said.

During the quarter, IHOP opened a first restaurant in Dubai, in partnership with franchisee M.H. Alshaya, which plans to open 40 restaurants in the Middle East. Stewart said the Dubai opening was one of the most successful for the chain, indicating a hunger for such brands overseas.

Stewart said she was pleased with results at Applebee’s, where sales improved across all dayparts during the quarter, particularly at lunch and late night. “The revitalization is working, and we’ll continue to do more,” she said.

Efforts to build bar sales are working too, she said. The bar mix has grown to 14 percent of sales, up from 12 percent when the chain was acquired five years ago. Stewart said she would like to see that mix increase to around 16 percent.

During the quarter, Applebee’s reached its goal of becoming 99-percent franchised with the completion of two refranchising deals that netted about $87 million, which went toward retiring debt. On Oct. 3, another refranchising deal closed, netting another $24 million for debt reduction.

The company has knocked about $960 million off of its debt since acquiring Applebee’s for about $2.1 billion.

In its outlook for the year, DineEquity reiterated previous projections that Applebee’s same-store sales would increase between 0.5 percent to 2.5 percent.

IHOP’s same-store sales for the year are expected to be toward the low end of negative 1.5 percent to positive 1.5 percent.

The company is expecting franchisees to open a total of 30 to 40 new Applebee’s this year, about half of which will be in the U.S. About 45 to 55 new IHOP locations were expected to open this year, mostly in the U.S.

At the end of the quarter, the Applebee’s chain included 2,016 restaurants, and IHOP had a total of 1,565 locations.

Contact Lisa Jennings at [email protected].
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