netrashetty
Netra Shetty
DineEquity (NYSE: DIN) is a United States company that both franchises and operates restaurants. Headquartered in Glendale, California, the company was founded originally as IHOP (International House Of Pancakes) and changed its corporate identity after it acquired Applebee's.[1] On July 16, 2007, IHOP Corp. announced its intent to acquire the bar-and-grill chain Applebee's International, Inc. in an all-cash transaction, valued at approximately US$2.1 billion. Under the deal, IHOP paid $25.50 per share for Applebee's. IHOP stated it would franchise most of Applebee's 500 company-owned stores. Applebee's has 1,943 restaurants overall worldwide, including those operated by franchisees.[2]
Julia Stewart, who originally worked as a waitress at IHOP and would work her way up through the restaurant industry, became Chief Executive Officer of IHOP Corp. She had previously been President of Applebee’s, but left after being overlooked for that company's CEO position. She became CEO of IHOP in 2001, and returned to manage her old company due to the acquisition. [3]
With a larger than 70% vote, Applebee's stockholders approved the takeover, which closed on November 29, 2007. The deal beat 26 other offers to purchase the economically slumping Applebee's. A number of executives from Applebee's voted against the offer, the chain's largest individual shareholder, Applebee's director Burton "Skip" Sack plans to take IHOP to court to demand a higher amount of money to be paid to him as the purchasing price that IHOP is giving is unfair to the shareholders of Applebee's. As part of the purchase, a brand re-marketing scheme and revitalization of the Applebee's image was undertaken
Dine Equity Inc. (NYSE Euronext (NYX)
IN) operates Applebee's and the International House of Pancakes (IHOP), well-known chains of casual dining restaurants. Applebee's offers a variety of signature American foods like burgers and southwestern cuisine, and IHOP specializes in breakfast (although its menu includes lunch and dinner foods as well), serving over 700 million pancakes annually.[1] The company owns 1,976 Applebee's establishments and 1,344 IHOP restaurants across the globe.[2]
Franchise royalties are the company's primary revenue source, accounting for approximately 42.5% of the company's revenue.[3] In 2003, DIN began a refranchising initiative - meaning, transitioning company-owned restaurants to franshisees - for its IHOP restaurants, and in 2008 launched a similar effort for its Applebee's restaurants. This decision was driven by the large spread between the profitability of franchises vs. company-owned restaurants for DineEquity - DIN earned a 52.7% profit margin from franchisee-owned restaurants in 2007, while company-owned restaurants operated at a 6.7% profit margin.[4] The refranchising efforts contributed to IHOP's 3.6% increase in operating margin and 21% increase in net income from 2003 to 2006 [4] and helped boost Applebee's operating margin by 1.2% in Q2 2008.[5]
In 2007, DIN earned approximately $484.5 million in revenue, a 40% increase from 2006 which was mainly due to DIN's acquisition of the Applebee's restaurant chain during 2007. However, net income declined from $44.5 million in 2006 to a loss of $480,000 because of costs associated with the acquisition.[4]
Contents
1 Business Overview
1.1 Business Segments
1.1.1 Applebee's Neighborhood Grill and Bar (25% of DIN's Revenue)
1.1.2 IHOP (75% of DIN's Revenue)
1.1.3 Franchise Operations (42.5% of Revenue, 65.5% of Net Income)
1.1.3.1 Applebee's Franchise Operations
1.1.3.2 IHOP's Franchise Operations
1.1.4 Company Restaurant Operations (26% of Revenue, 5% of Net Income)
1.1.4.1 Applebee's Company Restaurant Operations
1.1.4.2 IHOP's Company Restaurant Operations
1.1.5 IHOP's Rental Operations (27.3% of Revenue, 19% of Net Income)
1.1.6 IHOP's Financing Operations (4.2% of Revenue, 10.5% of Net Income)
1.2 Financial Analysis
2 Trends and Forces
2.1 Applebee's Refranchising Initiative Seeks to Increase DIN's Operating Margin
2.2 IHOP's Convenience and Value Dining Promotions Maintain Relevance with Customers
2.3 Weakened Economy Slows Restaurant Sales
3 Competition
4 References
Business Overview
Dine Equity Restaurant Location by Geographic Region[6]
Dine Equity Restaurant Breakdown by Operating Method[6]
Dine Equity Revenue by Business Segments[3]
DineEquity owns two restaurant chains in the casual and family dining category, Applebee's Neighborhood Grill and Bar and the International House of Pancakes (IHOP). DIN's restaurants are primarily operated by franchisees, as 2,641 of its 3,320 restaurants are operated by franchisees. In 2007, franchise operations revenue, primarily franchise royalty fees, accounted for 42.5% of DIN's revenue.[3] DIN's franchise operations also earn revenue through fees associated with opening new franchise restaurants and sales of retail items like IHOP pancake mix. The company focuses on its franchise operations as its franchisee-owned restaurants operate at a 57.2% profit margin, while company-owned restaurants operate at a 6.7% profit margin because of significantly lower expenses associated with franchisee-owned restaurants.[4] Overall, the company owns 1,976 locations of its Applebee's restaurants and 1,344 IHOP restaurants worldwide.[2] The company plans to open 50 to 65 new Applebee's restaurants and 65 to 70 IHOP restaurants in 2008, the majority of which will be franchisee-operated.[2]
The company recognizes its business segments as franchise operations, company restaurant operations, rental operations and financing operations across its two restaurant chains.
Business Segments
Applebee's Neighborhood Grill and Bar (25% of DIN's Revenue)
DIN acquired Applebee's on November 29, 2007 for $25.50 per share, or approximately $2.0 billion. Applebee's offers moderately priced American cuisine in a comfortable, friendly atmosphere that caters to a wide range of customers, including young adults, senior citizens and families with children. Applebee's operates 1,976 restaurants across 49 states and 18 different countries.[2] Applebee's only generates revenue in the franchise operations and company restaurant operations segments, which together accounted for $123 million in revenue or approximately 25% of DIN's 2007 revenue.[7] Applebee's 2007 revenue represents an overall 0.2% decrease in total restaurant sales from 2006, which can be mainly attributed to a 4% decrease in traffic at company-owned restaurants and a 2.1% decline in comparable restaurant sales which was partially offset by a 2% in average check size per customer.[8]
IHOP (75% of DIN's Revenue)
IHOP's 1,344 restaurants serve a wide variety of moderately-priced food in a casual family atmosphere and are often open 24 hours a day. IHOP's menu is focused primarily on breakfast items, including waffles, pancakes and omelets.[9] Of the 1,344 IHOP restaurants, 1,176 establishments are owned and operated by franchisees. IHOP restaurants are located nationwide, with 14 locations in Mexico, Canada and the Virgin Islands.[10] IHOP's main source of revenue is franchise revenues, which accounted for about 53% of IHOP's total revenue in 2007.[7] IHOP also operates in the company restaurant operations, rental and financing business segments. In 2007, IHOP totaled $361.6 million in revenue, about 75% of DIN's overall revenue. IHOP's revenue in 2007 represented a 9.7% increase from 2006, which the company attributes primarily to its 7.1% increase in IHOP franchise sales during 2007 and 2.2% increase in comparable restaurant sales across its restaurants.[11]
Franchise Operations (42.5% of Revenue, 65.5% of Net Income)
Applebee's Franchise Operations
Revenues from Applebee's franchise operations totaled approximately $14.2 million in 2007, accounting for about 7% of the company's total franchise operations revenue in 2007.[11] Currently, the company's franchise network consists of 78 franchisees, including 32 international franchisees.[12]
The company plans to begin an initiative during 2008 to transition Applebee's to a less capital-intensive business segment. To accomplish this, DIN plans to refranchise approximately 480 of its company-owned restaurants and to enter into sale-leaseback transactions on its approximate 190 company-owned real estate plots between 2008 and 2010 in order to reduce Applebee's operating and overhead expenses which will increase the company's operating margins.[13] Additionally, the company plans on opening a total of 50 to 65 new franchise restaurants during 2008.[14]
IHOP's Franchise Operations
In 2003, DIN launched an initiative to refocus IHOP on its franchise operations segment by refranchising company-operated restaurants and expanding its franchisee network in order to reduce costs associated with its lower operating margin company-operated locations. IHOP's franchise network consisted of 361 franchisees in 2007.[15] IHOP's revenue from franchise operations totaled approximately $191.6 million in 2007, which accounted for 93% of DIN's overall franchise revenue.[11] IHOP's revenue from franchise operations increased 7.1% from 2006, which the company attributes primarily to the 4.5% increase in number of franchise restaurants and 2.2% increase in comparable store sales during 2007.[11] DIN plans to open 55 to 60 franchise IHOP restaurants during 2008.[16]
Company Restaurant Operations (26% of Revenue, 5% of Net Income)
Applebee's Company Restaurant Operations
As of the end of fiscal 2007, DIN owned and operated 511 Applebee's restaurants nationwide, with one location in Shanghai, China.[14] As previously mentioned, however, the company plans to transition Applebee's to a 98% franchise concept beginning in 2008, with plans to refranchise about 480 restaurants between 2008 and 2010. In 2007 Applebee's company-owned restaurants earned $108.8 million in revenue, a 0.9% decrease from 2006, and accounted for about 86% of DIN's company restaurant sales in 2007.[11] The decline in revenue from company-owned restaurants is largely due to the 2.2% decrease in comparable restaurants sales and 4% decrease in guest traffic during 2007. The decrease in revenue was partially offset by the company's 2% increase in average guest check amount and increase in the number of company-owned restaurants.[8] In 2008, the company plans on opening only one or two company-owned restaurants.[17]
IHOP's Company Restaurant Operations
IHOP company restaurant sales for its 11 restaurants reached $17.1 million in 2007, an increase of $3.5 million from 2006.[11] DIN plans on maintaining IHOP as a franchisee-oriented operating segment and only plans on opening 5 to 10 new company-owned stores in 2008.[16]
IHOP's Rental Operations (27.3% of Revenue, 19% of Net Income)
IHOP's rental operations revenue includes revenue from operating leases for plots of land on which franchised restaurants are located. In 2007, revenue from rental operations reached $132.4 million, a 0.5% decrease from 2006, and represented 27.3% of the company's income in 2007.[18][3]
IHOP's Financing Operations (4.2% of Revenue, 10.5% of Net Income)
IHOP also earns revenue by leasing equipment like cooking appliances needed in IHOP locations as well as interest earned through DIN's financing of franchise fees and equipment leases. In 2007 revenue from equipment leases reached approximately $20.5 million, or 4.2%[3] of the company's total revenue.
Financial Analysis
Dine Equity 5 Year Financial Performance[4]
DIN's revenue reached approximately $484.5 million[4] in 2007, almost a 40% increase from 2006 which can be mainly attributed to the company's acquisition of Applebee's and resulting $109 million[19] of additional revenue provided by company restaurant operations. DIN earned approximately $205.8 million[4] in 2007 from franchise operations, accounting for about 42.5% of the company's revenue. Franchise operations, DIN's primary revenue source, has grown approximately 47% since 2003[4] mostly because of significant additions of new franchised restaurants and refranchising of company-operated restaurants during that period, as DIN has added 220 franchised restaurants since 2003[20]. However, the company's overall revenue decreased from $404 million to $350 million between 2003 and 2006[4]because of decreases in revenue earned from IHOP company restaurants and financing operations, which were expected as part of DIN's refranchising initative.
Although DIN's revenue declined approximately 15%[4] during its refranchising iniative, the company's efforts significantly boosted its operating margin. Because of lower operating expenses associated with company-operated restaurants, DIN's operating margin increased from 9.1% in 2003 to 12.7% in 2006[4] and DIN totaled almost $44.5 million in net income in 2006, a 21% increase from 2003.[4] In 2007, the company lost $480,000[4] because of costs associated with its acquisition of the Applebee's restaurant chain although DIN plans on refranchising approximately 480 Applebee's locations between 2008 and 2010 which will lower the company's operating expenses and increase its net income.
Trends and Forces
Applebee's Refranchising Initiative Seeks to Increase DIN's Operating Margin
DIN's extensive Applebee's refranchising campaign plans to transition the chain to an almost entirely franchisee-operated concept by selling its company-owned restaurants to franchisees. By reducing the amount of company-operated restaurants, DIN will reduce its operating expenses and increase its operating margin across its Applebee's restaurant chain, similar to its IHOP refranchising initiative launched in 2003. From 2008 to 2010, the company plans to refranchise approximately 480 of its 511 company-operated restaurants and sell 190 company-owned plots of land on which restaurants operate nationwide, 181 of which had been sold by Q2 2008[21]. The company also opened 53 new franchise restaurants since Q2 2007, 11 of which were opened during Q2 2008 and plans to refranchise a total of 100 restaurants during 2008[5]. DIN's refranchising efforts resulted in a 1.2% increase in Applebee's operating margin during Q2 2008, which reached 12.7%.[5] Furthermore, although the company's restaurants suffered a 1.7% in comparable store sales during Q2 2008, Applebee's franchise operations net income increased by 11.8% in Q2 2008.[5] The company attributes the decline in comparable store sales to weakened consumer spending, but Applebee's profit margin will continue to increase as it transitions to a less capital-intensive, franchisee-owned system.
IHOP's Convenience and Value Dining Promotions Maintain Relevance with Customers
A 2007 RBC Capital Markets Survey indicated that 39% of respondents had reduced their frequency of dining at restaurants because of lower levels of dispensable income.[22] In response, IHOP launched several value-oriented promotions starting in 2007 including All-You-Can-Eat Pancakes - unlimited pancakes as well as sides of eggs, meat and hash browns for only $4.99.[5]
In addition, IHOP created the IHOP 'n Go takeout program in February 2007 to cater to consumers emerging demand for convenience dining options.[23] Convenient food options are rapidly gaining popularity, as 21% of respondents to a 2008 National Restaurant Association Survey ordered takeout at least once a week, up from 9% in 2005.[24] As of Q2 2008, takeout sales accounted for approximately 4% of IHOP's sales as the company seeks to appeal to the on-the-go consumers.[25]
Together, IHOP's promotional activities have helped to maintain IHOP's comparable store sales growth for 22 consecutive quarters as of Q2 2008.[5] For example, IHOP's comparable store sales increased 2.6% in Q2 2008[5], despite a 1.4% decline in the growth of the restaurant industry as a whole.[26]
Weakened Economy Slows Restaurant Sales
The subprime lending crisis during 2007 drastically weakened the U.S. economy, meaning American consumers have less disposable income. This has in turn led to lower revenues for the restaurant dining sector as people save money and eat at home. As previously mentioned, many consumers reduced their frequency of dining at restaurants during 2007. Furthermore, the Technomic 2007 Restaurant Industry Study attributed poor economic conditions as the cause for restaurants to reduce funding for expansion by an average of 1.4% during 2007[27]. IHOP's sales have remained strong despite a downturn in consumer spending but DIN attributes Applebee's 4% decrease in customer traffic and 2.1% decline in comparable store sales during 2007 to weakened consumer spending.[8] During 2007, Applebee's launched several value meal promotions to improve sales, like its 3 Course Classics, which include an appetizer, entree and dessert for only $9.99. Applebee's promotions, however, failed to reverse its declining sales as its comparable store sales decreased an additional 1.7% in Q2 2008.[5] The company plans to continue to attempt to position Applebee's as a value-oriented restaurant and will begin new value dining options during Q3 2008 in order to boost traffic and sales in the weakened economy.
Competition
Applebee's operates in the casual dining segment and competes with many small, locally or regionally-based casual restaurants as well as large national chains like Brinker International (EAT) restaurants, T.G.I. Friday's and Ruby Tuesday (RT).
Brinker International (EAT): The company operates four restaurants in the casual & upscale restaurants industry, including Chili's, Macaroni Grill, On the Border and Maggiano's. Although each restaurant competes with Applebee's, Chili's offers the most similar menu and atmosphere to Applebee's. The Macaroni Grill offers casual Italian dining in a relaxed atmosphere. EAT's On the Border restaurants sell Mexican cuisine in an upbeat, atmosphere and is best known for its fajitas and margaritas. Finally, its Maggiano's concept offers a more exquisite Italian menu than its Macaroni Grill restaurant chain, and is focused on a family-dining atmosphere. EAT operates 1,801 restaurants across its four chains and totated approximately $4.4 billion in revenue in 2007.[28]
T.G.I. Friday's: T.G.I. Friday's is operated by a privately held company, Carlson Restaurants Worldwide. T.G.I. Friday's offers a wide array of casual cuisine like burgers, nachos and chicken tenders at 928 restaurants worldwide.[29]
Ruby Tuesday: Ruby Tuesday's 945 restaurants worldwide offer casual American dining with a variety of appetizers, salads, and burgers. The company totaled approximately $1.36 billion in revenues in its fiscal 2008, which represented a 3.5% decrease from its fiscal 2007.[30] The company attributed this decline in sales mainly to a 9.8% decrease in comparable store sales during 2008.[30]
Company Revenue 2007 (Millions) Total Number of Restaurants Comparable Restaurant Sales 2007 (Negative) Net Income (Millions) (Loss)
Applebee's $122.957 1,976 (2.1%) ($3.042)
Brinker International (EAT) $4,376.9[28] 1,801[28] (2.7%)[28] $230.05[28]
Ruby Tuesday (RT) (Fiscal 2008) $1,360.30[30] 945[30] (9.8%)[30] $26.38[30]
IHOP restaurants operate in the family dining segment of the restaurant industry against numerous local, independent restaurants like diners as well as large national chains that serve similar cuisine like Denny's (DENN), Cracker Barrel Old Country Store of the CBRL Group (CBRL), and Bob Evans Farms (BOBE).
Denny's (DENN): Denny's operates 1,546 restaurants worldwide and offers a variety of American-style foods including breakfast items, appetizers, sandwiches and dinner entrees, but is most widely-known for its breakfast items, like its Grand Slam breakfast.[31] Similar to IHOP, most of Denny's restaurants are open 24 hours per day, 7 days a week. In 2007, Denny's reached approximately $939.4 million in revenue and $34.7 million in net income.[32]
CBRL Group (CBRL): The company operates 565 restaurants under its Cracker Barrel Country Store concept. Cracker Barrel restaurants offers a wide array of "country-style" cuisine like biscuits and gravy and chicken fried steak in a rustic, country-store design. The company earned 78% of its revenues through restaurant sales and an additional 22% of its revenue from retail sales in its country store, items including Cracker Barrel toys and apparel.[33] The company earned about $2.4 billion in revenue in 2006[33] and about $162 million in net income.
Bob Evans Farms (BOBE): Bob Evans Farms operates a total of 703 locations of its two restaurant concepts nationwide, its Bob Evans restaurants and Mimi's Cafe.[34] Bob Evans restaurants offer a variety of "comfort foods" like sausage gravy and roasted turkey and divides its sales fairly evenly through breakfast, lunch and dinner, at 31%, 37% and 32%, respectively.[34] Its Mimi's Cafe blends typical American cuisine with a Southern European atmosphere and lunch and dinner sales account for approximately 40% of revenue each.[34] In its fiscal 2008, Bob Evans restaurant reached approximately $1.74 billion in revenue and earned about $64.9 million in net income.[35]
Company Revenue 2007 (Millions) Total Number of Restaurants Comparable Restaurant Sales 2007 (Negative) Net Income (Millions) (Loss)
IHOP $361.602 1,344 2.2% $0.285
Denny's (DENN) $939.4[32] 1,546[32] 1.7%[32] $34.7[32]
CBRL Group (CBRL) $2,351.576[33] 565[33] 0.7%[33] $162.065[33]
Bob Evans Farms (BOBE) (Fiscal 2008) $1,737[35] 703[34] 1.8% (Cracker Barrel); (2.4%) (Mimi's Cafe)[35] $64.88[35]
Julia Stewart, who originally worked as a waitress at IHOP and would work her way up through the restaurant industry, became Chief Executive Officer of IHOP Corp. She had previously been President of Applebee’s, but left after being overlooked for that company's CEO position. She became CEO of IHOP in 2001, and returned to manage her old company due to the acquisition. [3]
With a larger than 70% vote, Applebee's stockholders approved the takeover, which closed on November 29, 2007. The deal beat 26 other offers to purchase the economically slumping Applebee's. A number of executives from Applebee's voted against the offer, the chain's largest individual shareholder, Applebee's director Burton "Skip" Sack plans to take IHOP to court to demand a higher amount of money to be paid to him as the purchasing price that IHOP is giving is unfair to the shareholders of Applebee's. As part of the purchase, a brand re-marketing scheme and revitalization of the Applebee's image was undertaken
Dine Equity Inc. (NYSE Euronext (NYX)
IN) operates Applebee's and the International House of Pancakes (IHOP), well-known chains of casual dining restaurants. Applebee's offers a variety of signature American foods like burgers and southwestern cuisine, and IHOP specializes in breakfast (although its menu includes lunch and dinner foods as well), serving over 700 million pancakes annually.[1] The company owns 1,976 Applebee's establishments and 1,344 IHOP restaurants across the globe.[2]Franchise royalties are the company's primary revenue source, accounting for approximately 42.5% of the company's revenue.[3] In 2003, DIN began a refranchising initiative - meaning, transitioning company-owned restaurants to franshisees - for its IHOP restaurants, and in 2008 launched a similar effort for its Applebee's restaurants. This decision was driven by the large spread between the profitability of franchises vs. company-owned restaurants for DineEquity - DIN earned a 52.7% profit margin from franchisee-owned restaurants in 2007, while company-owned restaurants operated at a 6.7% profit margin.[4] The refranchising efforts contributed to IHOP's 3.6% increase in operating margin and 21% increase in net income from 2003 to 2006 [4] and helped boost Applebee's operating margin by 1.2% in Q2 2008.[5]
In 2007, DIN earned approximately $484.5 million in revenue, a 40% increase from 2006 which was mainly due to DIN's acquisition of the Applebee's restaurant chain during 2007. However, net income declined from $44.5 million in 2006 to a loss of $480,000 because of costs associated with the acquisition.[4]
Contents
1 Business Overview
1.1 Business Segments
1.1.1 Applebee's Neighborhood Grill and Bar (25% of DIN's Revenue)
1.1.2 IHOP (75% of DIN's Revenue)
1.1.3 Franchise Operations (42.5% of Revenue, 65.5% of Net Income)
1.1.3.1 Applebee's Franchise Operations
1.1.3.2 IHOP's Franchise Operations
1.1.4 Company Restaurant Operations (26% of Revenue, 5% of Net Income)
1.1.4.1 Applebee's Company Restaurant Operations
1.1.4.2 IHOP's Company Restaurant Operations
1.1.5 IHOP's Rental Operations (27.3% of Revenue, 19% of Net Income)
1.1.6 IHOP's Financing Operations (4.2% of Revenue, 10.5% of Net Income)
1.2 Financial Analysis
2 Trends and Forces
2.1 Applebee's Refranchising Initiative Seeks to Increase DIN's Operating Margin
2.2 IHOP's Convenience and Value Dining Promotions Maintain Relevance with Customers
2.3 Weakened Economy Slows Restaurant Sales
3 Competition
4 References
Business Overview
Dine Equity Restaurant Location by Geographic Region[6]
Dine Equity Restaurant Breakdown by Operating Method[6]
Dine Equity Revenue by Business Segments[3]
DineEquity owns two restaurant chains in the casual and family dining category, Applebee's Neighborhood Grill and Bar and the International House of Pancakes (IHOP). DIN's restaurants are primarily operated by franchisees, as 2,641 of its 3,320 restaurants are operated by franchisees. In 2007, franchise operations revenue, primarily franchise royalty fees, accounted for 42.5% of DIN's revenue.[3] DIN's franchise operations also earn revenue through fees associated with opening new franchise restaurants and sales of retail items like IHOP pancake mix. The company focuses on its franchise operations as its franchisee-owned restaurants operate at a 57.2% profit margin, while company-owned restaurants operate at a 6.7% profit margin because of significantly lower expenses associated with franchisee-owned restaurants.[4] Overall, the company owns 1,976 locations of its Applebee's restaurants and 1,344 IHOP restaurants worldwide.[2] The company plans to open 50 to 65 new Applebee's restaurants and 65 to 70 IHOP restaurants in 2008, the majority of which will be franchisee-operated.[2]
The company recognizes its business segments as franchise operations, company restaurant operations, rental operations and financing operations across its two restaurant chains.
Business Segments
Applebee's Neighborhood Grill and Bar (25% of DIN's Revenue)
DIN acquired Applebee's on November 29, 2007 for $25.50 per share, or approximately $2.0 billion. Applebee's offers moderately priced American cuisine in a comfortable, friendly atmosphere that caters to a wide range of customers, including young adults, senior citizens and families with children. Applebee's operates 1,976 restaurants across 49 states and 18 different countries.[2] Applebee's only generates revenue in the franchise operations and company restaurant operations segments, which together accounted for $123 million in revenue or approximately 25% of DIN's 2007 revenue.[7] Applebee's 2007 revenue represents an overall 0.2% decrease in total restaurant sales from 2006, which can be mainly attributed to a 4% decrease in traffic at company-owned restaurants and a 2.1% decline in comparable restaurant sales which was partially offset by a 2% in average check size per customer.[8]
IHOP (75% of DIN's Revenue)
IHOP's 1,344 restaurants serve a wide variety of moderately-priced food in a casual family atmosphere and are often open 24 hours a day. IHOP's menu is focused primarily on breakfast items, including waffles, pancakes and omelets.[9] Of the 1,344 IHOP restaurants, 1,176 establishments are owned and operated by franchisees. IHOP restaurants are located nationwide, with 14 locations in Mexico, Canada and the Virgin Islands.[10] IHOP's main source of revenue is franchise revenues, which accounted for about 53% of IHOP's total revenue in 2007.[7] IHOP also operates in the company restaurant operations, rental and financing business segments. In 2007, IHOP totaled $361.6 million in revenue, about 75% of DIN's overall revenue. IHOP's revenue in 2007 represented a 9.7% increase from 2006, which the company attributes primarily to its 7.1% increase in IHOP franchise sales during 2007 and 2.2% increase in comparable restaurant sales across its restaurants.[11]
Franchise Operations (42.5% of Revenue, 65.5% of Net Income)
Applebee's Franchise Operations
Revenues from Applebee's franchise operations totaled approximately $14.2 million in 2007, accounting for about 7% of the company's total franchise operations revenue in 2007.[11] Currently, the company's franchise network consists of 78 franchisees, including 32 international franchisees.[12]
The company plans to begin an initiative during 2008 to transition Applebee's to a less capital-intensive business segment. To accomplish this, DIN plans to refranchise approximately 480 of its company-owned restaurants and to enter into sale-leaseback transactions on its approximate 190 company-owned real estate plots between 2008 and 2010 in order to reduce Applebee's operating and overhead expenses which will increase the company's operating margins.[13] Additionally, the company plans on opening a total of 50 to 65 new franchise restaurants during 2008.[14]
IHOP's Franchise Operations
In 2003, DIN launched an initiative to refocus IHOP on its franchise operations segment by refranchising company-operated restaurants and expanding its franchisee network in order to reduce costs associated with its lower operating margin company-operated locations. IHOP's franchise network consisted of 361 franchisees in 2007.[15] IHOP's revenue from franchise operations totaled approximately $191.6 million in 2007, which accounted for 93% of DIN's overall franchise revenue.[11] IHOP's revenue from franchise operations increased 7.1% from 2006, which the company attributes primarily to the 4.5% increase in number of franchise restaurants and 2.2% increase in comparable store sales during 2007.[11] DIN plans to open 55 to 60 franchise IHOP restaurants during 2008.[16]
Company Restaurant Operations (26% of Revenue, 5% of Net Income)
Applebee's Company Restaurant Operations
As of the end of fiscal 2007, DIN owned and operated 511 Applebee's restaurants nationwide, with one location in Shanghai, China.[14] As previously mentioned, however, the company plans to transition Applebee's to a 98% franchise concept beginning in 2008, with plans to refranchise about 480 restaurants between 2008 and 2010. In 2007 Applebee's company-owned restaurants earned $108.8 million in revenue, a 0.9% decrease from 2006, and accounted for about 86% of DIN's company restaurant sales in 2007.[11] The decline in revenue from company-owned restaurants is largely due to the 2.2% decrease in comparable restaurants sales and 4% decrease in guest traffic during 2007. The decrease in revenue was partially offset by the company's 2% increase in average guest check amount and increase in the number of company-owned restaurants.[8] In 2008, the company plans on opening only one or two company-owned restaurants.[17]
IHOP's Company Restaurant Operations
IHOP company restaurant sales for its 11 restaurants reached $17.1 million in 2007, an increase of $3.5 million from 2006.[11] DIN plans on maintaining IHOP as a franchisee-oriented operating segment and only plans on opening 5 to 10 new company-owned stores in 2008.[16]
IHOP's Rental Operations (27.3% of Revenue, 19% of Net Income)
IHOP's rental operations revenue includes revenue from operating leases for plots of land on which franchised restaurants are located. In 2007, revenue from rental operations reached $132.4 million, a 0.5% decrease from 2006, and represented 27.3% of the company's income in 2007.[18][3]
IHOP's Financing Operations (4.2% of Revenue, 10.5% of Net Income)
IHOP also earns revenue by leasing equipment like cooking appliances needed in IHOP locations as well as interest earned through DIN's financing of franchise fees and equipment leases. In 2007 revenue from equipment leases reached approximately $20.5 million, or 4.2%[3] of the company's total revenue.
Financial Analysis
Dine Equity 5 Year Financial Performance[4]
DIN's revenue reached approximately $484.5 million[4] in 2007, almost a 40% increase from 2006 which can be mainly attributed to the company's acquisition of Applebee's and resulting $109 million[19] of additional revenue provided by company restaurant operations. DIN earned approximately $205.8 million[4] in 2007 from franchise operations, accounting for about 42.5% of the company's revenue. Franchise operations, DIN's primary revenue source, has grown approximately 47% since 2003[4] mostly because of significant additions of new franchised restaurants and refranchising of company-operated restaurants during that period, as DIN has added 220 franchised restaurants since 2003[20]. However, the company's overall revenue decreased from $404 million to $350 million between 2003 and 2006[4]because of decreases in revenue earned from IHOP company restaurants and financing operations, which were expected as part of DIN's refranchising initative.
Although DIN's revenue declined approximately 15%[4] during its refranchising iniative, the company's efforts significantly boosted its operating margin. Because of lower operating expenses associated with company-operated restaurants, DIN's operating margin increased from 9.1% in 2003 to 12.7% in 2006[4] and DIN totaled almost $44.5 million in net income in 2006, a 21% increase from 2003.[4] In 2007, the company lost $480,000[4] because of costs associated with its acquisition of the Applebee's restaurant chain although DIN plans on refranchising approximately 480 Applebee's locations between 2008 and 2010 which will lower the company's operating expenses and increase its net income.
Trends and Forces
Applebee's Refranchising Initiative Seeks to Increase DIN's Operating Margin
DIN's extensive Applebee's refranchising campaign plans to transition the chain to an almost entirely franchisee-operated concept by selling its company-owned restaurants to franchisees. By reducing the amount of company-operated restaurants, DIN will reduce its operating expenses and increase its operating margin across its Applebee's restaurant chain, similar to its IHOP refranchising initiative launched in 2003. From 2008 to 2010, the company plans to refranchise approximately 480 of its 511 company-operated restaurants and sell 190 company-owned plots of land on which restaurants operate nationwide, 181 of which had been sold by Q2 2008[21]. The company also opened 53 new franchise restaurants since Q2 2007, 11 of which were opened during Q2 2008 and plans to refranchise a total of 100 restaurants during 2008[5]. DIN's refranchising efforts resulted in a 1.2% increase in Applebee's operating margin during Q2 2008, which reached 12.7%.[5] Furthermore, although the company's restaurants suffered a 1.7% in comparable store sales during Q2 2008, Applebee's franchise operations net income increased by 11.8% in Q2 2008.[5] The company attributes the decline in comparable store sales to weakened consumer spending, but Applebee's profit margin will continue to increase as it transitions to a less capital-intensive, franchisee-owned system.
IHOP's Convenience and Value Dining Promotions Maintain Relevance with Customers
A 2007 RBC Capital Markets Survey indicated that 39% of respondents had reduced their frequency of dining at restaurants because of lower levels of dispensable income.[22] In response, IHOP launched several value-oriented promotions starting in 2007 including All-You-Can-Eat Pancakes - unlimited pancakes as well as sides of eggs, meat and hash browns for only $4.99.[5]
In addition, IHOP created the IHOP 'n Go takeout program in February 2007 to cater to consumers emerging demand for convenience dining options.[23] Convenient food options are rapidly gaining popularity, as 21% of respondents to a 2008 National Restaurant Association Survey ordered takeout at least once a week, up from 9% in 2005.[24] As of Q2 2008, takeout sales accounted for approximately 4% of IHOP's sales as the company seeks to appeal to the on-the-go consumers.[25]
Together, IHOP's promotional activities have helped to maintain IHOP's comparable store sales growth for 22 consecutive quarters as of Q2 2008.[5] For example, IHOP's comparable store sales increased 2.6% in Q2 2008[5], despite a 1.4% decline in the growth of the restaurant industry as a whole.[26]
Weakened Economy Slows Restaurant Sales
The subprime lending crisis during 2007 drastically weakened the U.S. economy, meaning American consumers have less disposable income. This has in turn led to lower revenues for the restaurant dining sector as people save money and eat at home. As previously mentioned, many consumers reduced their frequency of dining at restaurants during 2007. Furthermore, the Technomic 2007 Restaurant Industry Study attributed poor economic conditions as the cause for restaurants to reduce funding for expansion by an average of 1.4% during 2007[27]. IHOP's sales have remained strong despite a downturn in consumer spending but DIN attributes Applebee's 4% decrease in customer traffic and 2.1% decline in comparable store sales during 2007 to weakened consumer spending.[8] During 2007, Applebee's launched several value meal promotions to improve sales, like its 3 Course Classics, which include an appetizer, entree and dessert for only $9.99. Applebee's promotions, however, failed to reverse its declining sales as its comparable store sales decreased an additional 1.7% in Q2 2008.[5] The company plans to continue to attempt to position Applebee's as a value-oriented restaurant and will begin new value dining options during Q3 2008 in order to boost traffic and sales in the weakened economy.
Competition
Applebee's operates in the casual dining segment and competes with many small, locally or regionally-based casual restaurants as well as large national chains like Brinker International (EAT) restaurants, T.G.I. Friday's and Ruby Tuesday (RT).
Brinker International (EAT): The company operates four restaurants in the casual & upscale restaurants industry, including Chili's, Macaroni Grill, On the Border and Maggiano's. Although each restaurant competes with Applebee's, Chili's offers the most similar menu and atmosphere to Applebee's. The Macaroni Grill offers casual Italian dining in a relaxed atmosphere. EAT's On the Border restaurants sell Mexican cuisine in an upbeat, atmosphere and is best known for its fajitas and margaritas. Finally, its Maggiano's concept offers a more exquisite Italian menu than its Macaroni Grill restaurant chain, and is focused on a family-dining atmosphere. EAT operates 1,801 restaurants across its four chains and totated approximately $4.4 billion in revenue in 2007.[28]
T.G.I. Friday's: T.G.I. Friday's is operated by a privately held company, Carlson Restaurants Worldwide. T.G.I. Friday's offers a wide array of casual cuisine like burgers, nachos and chicken tenders at 928 restaurants worldwide.[29]
Ruby Tuesday: Ruby Tuesday's 945 restaurants worldwide offer casual American dining with a variety of appetizers, salads, and burgers. The company totaled approximately $1.36 billion in revenues in its fiscal 2008, which represented a 3.5% decrease from its fiscal 2007.[30] The company attributed this decline in sales mainly to a 9.8% decrease in comparable store sales during 2008.[30]
Company Revenue 2007 (Millions) Total Number of Restaurants Comparable Restaurant Sales 2007 (Negative) Net Income (Millions) (Loss)
Applebee's $122.957 1,976 (2.1%) ($3.042)
Brinker International (EAT) $4,376.9[28] 1,801[28] (2.7%)[28] $230.05[28]
Ruby Tuesday (RT) (Fiscal 2008) $1,360.30[30] 945[30] (9.8%)[30] $26.38[30]
IHOP restaurants operate in the family dining segment of the restaurant industry against numerous local, independent restaurants like diners as well as large national chains that serve similar cuisine like Denny's (DENN), Cracker Barrel Old Country Store of the CBRL Group (CBRL), and Bob Evans Farms (BOBE).
Denny's (DENN): Denny's operates 1,546 restaurants worldwide and offers a variety of American-style foods including breakfast items, appetizers, sandwiches and dinner entrees, but is most widely-known for its breakfast items, like its Grand Slam breakfast.[31] Similar to IHOP, most of Denny's restaurants are open 24 hours per day, 7 days a week. In 2007, Denny's reached approximately $939.4 million in revenue and $34.7 million in net income.[32]
CBRL Group (CBRL): The company operates 565 restaurants under its Cracker Barrel Country Store concept. Cracker Barrel restaurants offers a wide array of "country-style" cuisine like biscuits and gravy and chicken fried steak in a rustic, country-store design. The company earned 78% of its revenues through restaurant sales and an additional 22% of its revenue from retail sales in its country store, items including Cracker Barrel toys and apparel.[33] The company earned about $2.4 billion in revenue in 2006[33] and about $162 million in net income.
Bob Evans Farms (BOBE): Bob Evans Farms operates a total of 703 locations of its two restaurant concepts nationwide, its Bob Evans restaurants and Mimi's Cafe.[34] Bob Evans restaurants offer a variety of "comfort foods" like sausage gravy and roasted turkey and divides its sales fairly evenly through breakfast, lunch and dinner, at 31%, 37% and 32%, respectively.[34] Its Mimi's Cafe blends typical American cuisine with a Southern European atmosphere and lunch and dinner sales account for approximately 40% of revenue each.[34] In its fiscal 2008, Bob Evans restaurant reached approximately $1.74 billion in revenue and earned about $64.9 million in net income.[35]
Company Revenue 2007 (Millions) Total Number of Restaurants Comparable Restaurant Sales 2007 (Negative) Net Income (Millions) (Loss)
IHOP $361.602 1,344 2.2% $0.285
Denny's (DENN) $939.4[32] 1,546[32] 1.7%[32] $34.7[32]
CBRL Group (CBRL) $2,351.576[33] 565[33] 0.7%[33] $162.065[33]
Bob Evans Farms (BOBE) (Fiscal 2008) $1,737[35] 703[34] 1.8% (Cracker Barrel); (2.4%) (Mimi's Cafe)[35] $64.88[35]
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