DineEquity Outlook Extremely Uncertain

Back in 2007, DineEquity (NYSE:DIN) took on more than $2 billion in debt to acquire the Applebee's restaurant chain. Its strategy has been to sell most of the stores to franchisees but the plan has been slowed down by a recession, leaving the firm with an extremely uncertain outlook.

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Recent Sales Review
During its second quarter, DineEquity recorded a 2.8% revenue decline to $340 million. Sales at company-owned restaurants accounted for 62% of sales and fell 5.2% as the company sold off Applebee's stores to franchisees and same-store sales declined. Across the entire restaurant system, which includes company-owned and franchised locations, IHOP comps fell 1% and Applebee's comps dropped 1.6%.

The company released preliminary system-wide third-quarter comps last week. Applebee's comps improved 2.7% while IHOP comps eked out a 0.3% gain. Full third-quarter results will be released in early November.

Profit Trends and Outlook
Total costs during the second quarter grew 1.4% and pushed operating income down more than 38% to $22.3 million. Net income fell 43.4% to $14 million. Subtracting out preferred stock dividends and a number of other small items, net income fell to $7.4 million, or 42 cents per share.

For the full year, analysts expect sales to fall 4.5% to $1.4 billion and earnings of $3.49 per share.

Murky Results
Financial results at DineEquity have been extremely murky. Sales trends appear to be improving, but it's difficult to determine how profitable the existing operations are or will be going forward. Management is in the process of selling off company-owned Applebee's stores to franchisees, which means that reported sales will decline, though profits should increase as higher-profit franchise fees and rental revenues start coming in from the newly franchised stores.

Unfortunately, for some time the capital from selling the stores will go to pay down the company's hefty debt load. As of the end of the most recent quarter, indebtedness stood at $1.6 billion. This will take a long time; over the past two-and-a-half years, it has only paid down $300 million of debt and has likely been slower than scheduled because of the economic downturn brought on by the credit crisis.

The Bottom Line
The strategy did pay off when the company franchised most of its IHOP stores. It remains to be seen if the sale of the Applebee's stores will follow a similar trend. At this point it's extremely difficult to project out future company sales or cash flows with any certainty. Rivals with favorable valuations and clearer financial outlooks look more appealing and include Cracker Barrel (Nasdaq:CBRL), Brinker International (NYSE:EAT), Darden Restaurants (NYSE:DRI) and CEC Entertainment (NYSE:CEC). (For additional reading, take a look at The Impact Of Recession On Businesses.)

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