DineEquity Inc.DIN

Morningstar Rating

Stock Research and Analysis

by Jeremy Cohen

DineEquity is buried under a large pile of debt. Mounting pressures from a daunting retail environment have us concerned, though there are glimmers of hope from the firm's two strong brands.

DineEquity owns, operates, and franchises nearly 3,400 restaurants Read more

Bulls Say

The 50-year-old IHOP chain is one of the leading breakfast chains in America, serving more than 700 million pancakes per year. A new menu and remodeling of the chain is leading to a re-energized brand.

Applebee's dominates the grill and bar segment, with nearly 2,000 units, more than 40% larger than Chili's and twice as many as Ruby Tuesday. This scale provides huge marketing muscle.

The firm's purchasing cooperative is expected to produce commodity cost savings of 3%-5% for franchisees in the next few years, enhancing the appeal of franchising a DineEquity brand.

Management sees further growth opportunities for Applebee's in the U.S. and abroad. Outside the U.S., Applebee's already has more than 125 locations in 10 countries. Read more

Bears Say

Casual diners are susceptible to declines in consumer spending. A weakened economy is forcing customers to curb discretionary spending and instead allocate their money elsewhere.

DineEquity is facing minimum wage increases and volatile commodity costs at company-operated Applebee's restaurants, which is putting pressure on profits. Franchisees at both brands are also feeling the pain, which could slow expansion.

DineEquity may not maximize shareholder value by selling restaurants in a cyclical downturn. The company could also lose credibility with franchisees if it no longer operates a meaningful number of restaurants.

With the leveraged buyout of the struggling Applebee's chain, DineEquity's management has taken on considerable risk, especially considering the challenging industry conditions, which could get even worse. Read more

Strategy

The firm is embarking on a plan to turn Applebee's into a 98%-franchised business, similar to its IHOP concept. In 2009, it expects to franchise nearly half of its remaining company-owned Applebee's Read more

Management

If anybody is capable of turning DineEquity around, Julia Stewart, the leader behind the Applebee's acquisition, may be the person most needed at the top. Stewart has served at the helm of IHOP since 2002 and was partly responsible for its successful Read more

Profile

DineEquity franchises and operates restaurants under the IHOP and Applebee's brand names. IHOP's chain of nearly 1,400 restaurants (99% franchised) are famous for their Read more

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