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DineEquity works to reverse slow sales

After a failed promotion dampened momentum at Applebee’s in the third quarter, parent company DineEquity Inc. said it will work harder to combine value and innovation to reverse sliding sales, company officials said Thursday in a call discussing the quarter’s earnings.

Same-store sales declined for both Applebee’s Neighborhood Grill & Bar and IHOP, while net income increased 15 percent to $16.5 million, or 85 cents per share, for the quarter ended Sept. 30, compared with $14.3 million, or 44 cents per share, for the same quarter last year.

The results reflected lower interest rates and the elimination of stock dividends.

Revenue for the quarter declined to $264.5 million, compared with $335.5 million a year ago.

“There’s no question the soft economy is creating challenges,” said Julia Stewart, Glendale, Calif.-based DineEquity chairwoman and chief executive.

Applebee’s domestic systemwide same-store sales dropped 0.3 percent for the quarter, chiefly due to lower traffic that was partially offset by an increase in the average guest check, the company said.

Same-store sales declined 0.4 percent at franchised U.S. restaurants and 0.1 percent at company-operated units during the quarter. It was Applebee’s first decline after more than a year of positive sales trends.

Stewart attributed the results in part to a promotion of “Stacked Stuffed & Topped” entrées introduced in July, which she said “failed to resonate with guests.”

The promotion was pulled early and replaced in August with the return of the chain’s popular two-for-$20 deal.

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At 1,532-unit IHOP, same-store sales decreased 1.5 percent, also reflecting traffic declines and a higher average guest check.

The chain showed some improvement based on changes made in the second quarter, including a return to traditional advertising strategies and a renewed emphasis on value.

During the third quarter, IHOP introduced a limited-time Caramel Apple Sensations line for $4.99, as well as a free pancake giveaway on Halloween.

“There’s more that can and will be done,” Stewart said.

In September, the company held a conference for IHOP franchisees focused on improving such basics as quality, speed of service and cleanliness.

Stewart said DineEquity will do more to measure and hold franchisees accountable for making improvements.

Other highlights from the call:

Menu: On Nov. 14, Applebee’s will roll out a holiday promotion featuring new Sizzling Entrées.

Stewart said the promotion will include an attractive price point with an item including beef, an entrée that few competitors are likely to promote because of high costs this season, she said.

“The combination of value and innovation works for us,” she said. “If it’s just the ‘same old, same old,’ [guests] get tired of it.”

Applebee’s also tweaked its annual Veteran’s Day tribute, this year offering guests an opportunity to thank those who serve in the military for their service online, at Applebee’s Facebook page, on YouTube or on Twitter to #thankyoumovement. Restaurants also will collect and send personalized thank-you cards from guests to veterans and troops overseas.

In addition, Applebee’s offers free meals to veterans on Veteran’s Day, Nov. 11.

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Food costs: Rising food costs have hurt both brands, but particularly IHOP because of inflationary commodity pricing on pork and coffee. Stewart said she didn’t expect commodity inflation to ease next year.

“We will see another aggressive commodity increase,” she said. “I don’t think we’ll see a flattening out for a while.”

DineEquity will continue efforts to re-engineer products to offer value to customers while maintaining margins rather than discounting existing items so that “everybody makes money,” she said.

Remodeling: By the end of the year, Applebee’s will remodel 28 percent to 30 percent of its 2,010 locations. Remodeling has been shown to lift sales by mid-single digits, Stewart said.

Refranchising: DineEquity on Nov. 2 closed a previously announced deal to sell 62 Applebee’s locations in New England, Stewart said. The sale of another four in the region is expected to close soon.

With the completion of a previously announced sale of another 17 locations in the mid-South, the Applebee’s chain will be 92-percent franchised, Stewart said.

The company has sold 342 restaurants since it acquired the Applebee’s brand four years ago.

With the almost fully franchised IHOP chain, DineEquity is 95-percent franchised.

Outlook: DineEquity projected year-end earnings per share from $4.20 to $4.30. Analysts surveyed by Thomson Reuters expect $4.22 per share.

Applebee’s systemwide same-store sales for the year are expected to range from 1.5 percent to 2 percent, a reduction of previous estimates of 2 percent to 4 percent.

At IHOP, same-store sales projections for the year also were adjusted to negative 2 percent to negative 2.5 percent. Earlier projections had estimated a range of up 1 percent to down 2 percent.

By the end of the year, Applebee’s franchisees are expected to add 24 to 28 new restaurants, about half of which will be international locations.

About 55 to 60 IHOP locations are expected to open by the end of 2011, all of which will be in the United States.

Gift cards: DineEquity has a new partnership with Target, which will offer Applebee’s and IHOP gift cards in 1,760 stores this holiday season. Walmart also carries DineEquity gift cards.

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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