GLENDALE Calif. Increased interest expenses from the year-ago purchase of Applebee’s International Inc. widened the losses of franchisor DineEquity Inc. for the third quarter to $16.4 million, or 98 cents per share, the company reported Monday. The results compare with a year-ago loss of $11.6 million, or 69 cents a share.
But DineEquity, which also franchises the IHOP chain, was able to calm investor concerns about its plan to pay down debt through the sale of company-operated Applebee’s units by announcing a deal to refranchise another 66 stores. The pending divestitures to franchisees in Texas and New Mexico also countered worries that the nation’s credit crunch would hinder the sales effort, which DineEquity has described as a crucial step in digesting the $1.9 billion Applebee’s purchase.
With this latest deal, which follows the sale of 44 formerly corporate restaurants in California, Delaware and Nevada, DineEquity said it has surpassed its own refranchising goals for the year, the company said.
DineEquity’s stock price rose 53.6 percent to $9.06 on Monday, although the stock is still off 74 percent for the year.
As of Monday, DineEquity said it has sold or is in the process of selling 110 Applebee’s locations, most of which are low performers. The sales are expected to generate $63 million in after-tax proceeds, which means the average location sold for about $570,000. Prior to this fall’s worsened economic environment and the subsequent credit freeze, DineEquity had estimated it could have garnered as much as $1 million per Applebee’s restaurant, according to an analyst’s report.
Still, combined with reductions in sale-leaseback rental obligations attached to these units, the company’s refranchising efforts so far will enable it to reduce debt and financing obligations by about $113 million, officials said. Combined with the company’s free cash flow, DineEquity said it expects to reduce its debt by a total of $500 million this year.
DineEquity’s debt load, which totals more than $2 billion, has been an area of concern among analysts covering the restaurant franchisor, as many restaurant companies have had trouble maintaining lending covenants and payment schedules because of economic pressures that have slowed sales and depleted profits.
“With additional steps around earnings enhancements coupled with our intention of dedicating free cash flow toward the reduction of consolidated funded debt, we are confident that we have created the appropriate amount of financial flexibility required to meet our debt obligations over and above executing our core asset disposition plan,” DineEquity chairman and chief executive Julia Stewart said in a statement.
But results for the third quarter ended Sept. 30 show the company’s debt load still is hurting earnings. Officials blamed the $50.5 million in increased interest from the financing of its $2 billion-plus leveraged buyout of Applebee’s in November 2007, as well as non-cash impairment charges of $28.3 million from the recent sales of corporate Applebee’s units. Excluding those costs, the company earned 47 cents per share.
Revenue increased to $391.2 million from $91.4 million a year ago, which was prior to the Applebee’s acquisition.
For the IHOP brand, same-store sales were up 0.2 percent during the quarter. Officials credited limited-time offers such as the Discover America Pancakes and Fruit Crepe Fever promotions.
IHOP franchisees and area developers opened 19 new locations during the quarter bringing the total to 1,375 locations. The company reiterated expectations that 65 to 70 new IHOP units will open in fiscal 2008.
Applebee’s, however, reported a 3.1 percent drop in systemwide domestic same-store sales during the quarter, which company officials blamed on declining consumer spending and a disappointing response to value promotions. The chain’s margins did improve by 2.2 percent from a year ago, the company reported.
The 1,994-unit chain plans to move forward with planned brand revitalization efforts, including the introduction of a value oriented “Two for $20” promotion this month, as well as new menu items to be introduced by Jan. 1. The latest promotion offers a dinner for two, including a shared appetizer and two entrees for $20.
DineEquity expects IHOP’s annual same-store sales to be at the lower end of the 2-percent to 4-percent growth range. Annual same-store sales at Applebee’s are expected to decline between 1 percent and 2 percent.